Where's the Bottom?

Tue, 13 Jan 2009 07:07:00 -0800

What Does The Real Estate Market "Bottom" Look Like?

What does the bottom of the market look like? Is it just the day when the chart shows the line changing from down to up? No, in reality that is not it. The bottom happens months before the line changes and it happens in the following ways:

1. The number of homes for sale will shrink a little each month.

2. The homes which are really gorgeous will begin to be taken out of inventory by more aggressive buyers.

3. Buyers will start looking and find that there are short waiting lists for new home communities and that the new homes are starting to see price changes upward and deal making by the builders will stall or stop altogether.

Here is a classic example of how buying at the bottom works: A buyer is interested in a home that sold two years ago for $700,000; the price today is $500,000. The buyer says they think the market is still soft and will wait for the home to hit $400,000. The home continues to decline in price but at the very bottom hits only $425,000. Then the turn happens. The more aggressive people who have been waiting for the bottom to occur have stepped in and are buying up the "Best Properties". They are getting the granite counters, the stainless steel appliances, the right colors, the best lot, and the right school district. Yes, they paid $437,500 (that is $37,500 too much for our price buyer) for the home, but they are now on the other side of the real estate game. The folks who decided on a price that the market must reach are still waiting.

What I want you to get out of this note is that the real estate market, unlike the stock market (no one sleeps in their stock) has real bottoms that are not zero. If a stock crashes and becomes worthless or zero then you lose everything on that stock. But how can real estate become worthless? Can the land disappear? Will labor become free for building homes? Will the fact that the city/county charges $80,000 to get a new home permit affect value? Will the price of lumber and concrete and appliances go to zero? Of course not! A home has intrinsic value that can be calculated.

The homebuyer that waits for the bottom is very likely to lose on several points:

1. The home they really wanted is sold to someone else.

2. They end up waiting until they pay $500,000 for the home that is "almost like the one they wanted".

3. This is a real loss of $75,000 before the homebuyer ever gets started. The folks who paid $437,000 "overpaid" by $12,500 but they got the home they wanted, with the granite and the stainless steel, Cul de Sac lot and their preferred school district. They have made $62,500 on the up market and therefore are ahead of the game with the positive equity they have earned.

Do you still want to wait?

Take notice that the builders are building fewer and fewer homes and the inventory that was created by flippers, no-money-downers, and outright cheaters will eventually be soaked up. In Santa Clara County, the current inventory of Single Family Homes is down to 3797, after peaking (for the past 12 months) at 5451 last May. Of these nearly 4000 homes, aproximately 750 are REO's (Bank Owned). This inventory may not contain the home of your dreams; however there are some great deals to be had.

And never in the history of Real Estate have we seen a downturn like this one. Historically, either prices OR interest rates have been low, but never BOTH at the same time! There has never been a better time to buy Real Estate than now.

And the simple truth about creating wealth through equity in Real Estate has always been less about "Timing" the market, and more about Time In The Market.

So the question now isn't "Can I afford to buy?" The question you should be asking yourself is: "Can I afford to wait any longer?"

Pat Knoop Blog

Where's the Bottom?