Real estate 'Car-Lot Syndrome'
Essay: Roadmap to Recovery
By Inman News, Monday, January 5, 2009.
Editor's note: Inman News has called upon our readers to engage in the Roadmap to Recovery editorial project, which focuses on the future direction of the real estate industry. Click here for details.
By DICK DENNIS
When you drive your brand new car out of the dealer’s lot (during normal times) you know that you have automatically lost between 10 percent and 20 percent of its selling-to-you value. Yet, most people continue to make their payments on their new vehicle for as long as six years even though they are “underwater” with the loan on their new car. They don’t turn in their keys and walk away.
The main reason for this phenomenon is that in ordinary times they are churning out new cars daily, making sure the supply-demand principle holds up and almost any car will have a lesser value than what it sold for new.
Then what makes people think houses are any different in this economy? The supply of houses has been warped by the overstocked inventories owned by lenders across this nation of ours. To further warp the demand for houses, lenders are being very choosy as to whom they select as borrowers to buy those houses.
We now have the "Car-Lot Syndrome" in real estate. As soon as we close escrow -- in effect driving it out of the lot -- we can expect the value of our new residence to have lost value. There is a lot smaller demand for houses the way we became used to in normal supply-demand times. Homebuilders became spoiled when a whole variety of loans made it easy for almost anybody to buy their ever-larger-square-foot products. So they built some more of those homes, thus skewering the supply-demand theory in housing.
There is an exception in the value of cars. When time has passed and older cars have been preserved and maintained, they become known as antiques or classics. Their values -- guess what -- move up! There is more of a demand for them than there is a supply. Therefore the value rises.
The same will happen to homes as well. That is, if today’s frustrated sellers hold onto their properties. As long as REOs (bank-owned properties) flood the market, prices will sink. The frustrated sellers will continue to be frustrated -- the homes that will be resold will not be called vintage or classics. When the REOs are all bought up, the regular real estate market returns, buyers see improved credit scores and (the economy improves), there will be a demand for employees and those employees will want their own homes again.
Once again there will be a larger demand than supply in homes. That is when we can expect a more steady, sane rise in real estate values.
That is when today’s home sellers can expect to get a better price than what they have resigned themselves to today. It will take time, and by then the inflation rate will warp our sense of value all over again.
But that is another story.
Richard "Dick" C. Dennis is a Realtor in Sun City, Calif.
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Submitted by Robert A. Hulme on January 5, 2009 - 4:58am.
That time is now, we will see a dramatic turnaround in the near future. Homes will start to increase in value, confidence in the housing market is on the rise, the glass is half full here, if your glass is not half full then make it half full. A positive mental attitude is necessary to make this transition complete, will you be the one help?
Robert A. Hulme
Realtor, GRI, e-PRO
Prudential Utah Real Estate
Loan Officer
Envision Lending Group, Inc.
www.UtahCountyRealEstate.us
www.UtahCountyHomes.ws
801-885-2586
Submitted by Stew Keene - Realtor on January 5, 2009 - 7:05am.
Mr Dennis,
I have also pondered this comparison and after much thought, you simply can not compare car to house phenom side by side.
There are some dramatic differences between the car and home analysis, depreciating values and rights as Americans.
First, car loans are amortized over 3-6 years. Home loans are amortized over 30-40 years. Cars have no land underneath them, homes do.
A home is a place you reside and need. A car is a disposable piece of transportation as alternative forms are available. Cars are a luxury.
There is an advantage that owning a home provides that far out weighs the car. The tax payment and interest are deductible for the average American and car loan payments and interest are not.
And one more thing, our forefathers who built this country did so because they were tired of the kings, royalty and lords owning all of the land making them tenants.
As the first line of the preamble of the Realtor code of ethics states "Under all is the land".
We have the right to land ownership that's written in to our constitution.
Nothing in there states we have the right to car ownership.
So I would be very careful in comparing the two as in reality they have nothing in common.
Our market will improve on it's own. Patience and perseverance works every time.
Respectfully,
Stew Keene
Inspire Realty Group - Keller Williams
Scottsdale, AZ
2008-2009 Master of Real Estate award recipient
ABR, GRI, ePro, CNE, MRE, AHWD
www.inspirerealtygroup.com
Submitted by Utah Realtor on January 5, 2009 - 9:05am.
I'd never thought of it like that. One of the biggest fears buyers have is that they will buy a home, and it will drop in value. So they aren't buying right now. If their mind frame allowed dropped values we'd improve the market quicker.
Alan Barker
Cornerstone Real Estate Pros
www.UtahCornerstone.com
www.RealEstateLogan.com
Submitted by Jonathan Kauffmann on January 5, 2009 - 11:03am.
I understand the thought process of comparing a home to a car, but, overall, I disagree.
Except in extreme instances, a car is basically a commodity. There are very few cars that are truly unique. If you go to a car dealership and they are out of that black Honda with tan leather interior, they can have it for you within a few days.
Homes are much more unique than cars. In fact, when you take into account location, finishes, floor plan, etc - there are no 2 homes are exactly alike.
As compared to the past several years, there are more and more people looking at their home as commodity than before. However, there are still a large percentage of buyers and owners that see their home as a very special place that is a reflection of themselves. Because of this, certain homes will always be worth more to certain people.
And although we're less likely to look at primary homes as a source of short-term appreciation, there still is a chance for home values to rise in the long term.
I also agree with Stew - the tax benefits of homeownership will always be an advantage over car ownership.
Jonathan Kauffmann
www.NestRealtyGroup.com
Submitted by William Metzker on January 5, 2009 - 1:32pm.
The de facto commodification of homes was a by product, and then a cause, of the real estate bubble and subsequent meltdown. New owners weren't talking about homes as places to accomodate their lifestyles, they were talking about how much their house's value had or would go up.
Submitted by Gregory Bain on January 5, 2009 - 4:45pm.
Gregory Bain, ABR, SRES
Realtor Associate
NJHomes@Ask4Greg.com
Dick, I for one - think it is a perfect analogy using like items. I am so sick of hearing from my peers about the "special" item we sell and the down the nose attitude of our associates, the car salesman.
Oh, I can already see the veins popping out of the other readers necks and the rise in temperature in the collective room. But, truth be told, we are just salesmen. The title clerk, mortgage rep, home inspector, lawyer, can all be likened to the mechanic, license and tag clerk, finance guru found at a car lot.
The problem with houses is the price. People don't make enough to own one anymore. And, like automobiles, they need to re-think the whole loan process. It was once standard to have a three year note to pay off a car. Now, it is five to seven. Does the mortgage industry have ears?
Our standard of living has changed since Mom and Dad, or Grandpa bought a house. The type of ownership also needs to change. Maybe even a lease type of ownership since the new America moves so often from home to home?
While everyone seems to be claiming the market will re-bound any day now, Inman News has one of the MOST INFLUENTIAL BLOGS as www.patrick.net and one of the most watched youtube economic guru is Peter Schiff - watch here: http://www.youtube.com/watch?v=2I0QN-FYkpw
The NAR is our problem with its thinking that is keeping us from coming into the new world. The only thing is the business model of Banking and Automotive Industry has an even worse mind set.
I think you will find the phrase, "they have ears, but cannot hear" in you google search.
Submitted by Stefan Swanepoel on January 7, 2009 - 10:28am.
Great analogy and article.
Stefan Swanepoel
Author: Swanepoel TRENDS Report
www.ReTrends.com