The State of the Markets

Source: Cirios Real Estate

This post first appeared in the March edition of: Cirios Trends: In Search of Real Estate Opportunities.

Last month, we discussed the role confidence plays in the housing market. The better Americans feel about the economy (using the stock market as a barometer of the country’s economic fortunes), the more likely they are to go out and buy a house.

Sticking with the theme of market psychology, let’s now examine the other side of the transaction: Sellers.

In today’s market, sellers basically fall into two categories: Those who can, and those who can’t. In other words, if you still have equity, you can sell. If you are underwater on your house, you can’t.

The decision for the latter of whether to sell is, unfortunately, pretty simple. So let’s consider the former, those fortunate homeowners who still have equity left in their homes.

Selling into a weak market is a drag. With so many homes to choose from, buyers can drive a hard bargain. And thanks to unrealistic expectations and bad advice from Realtors trying to win clients with lofty promises, thousands of sellers over-listed their homes and subsequently chased the market down throughout 2007, 2008 and 2009.

Very few voluntary sellers dipped their toes into the market because it was just so bad. The only true sellers were those who had to sell for some reason or another.

So what now? Housing isn’t nearly as bad as it was this time last year, and in many markets the worst of the price declines are likely over. Stocks rallied fiercely last year, rebuilding many damaged nest eggs. And even though there are looming threats out there to our nascent - and very governmentally influenced - economic recovery, things are not nearly as dire as they once were.

We wrote back in May 2009 that “Willing and able buyers are pouring back into the market. And as they do, sellers - buoyed by newfound confidence - are prepping their homes for the market.” Although inventory remained constrained throughout 2009, the percentage of distressed sales relative to regular sales is slowly dropping.

Recent data is seeping out that supports our view, and the trend is picking up steam so far in 2010. The graph below, courtesy of SocketSite, shows active listed inventory in the city of San Francisco. Notably, the black line representing 2010 has reached to the orange 2008 line … and check out that slope!

Anecdotal evidence supports the data. Sellers are trying to get in ahead of the summer buyer season, particularly with the (latest) expiration of the homebuyer tax credit just around the corner in June.

The State of the Markets

If someone were to wake up from a 5-year coma and ask about the state of our country’s economy, the chart below pretty much sums it up.

The past five years in the housing market, the financial market and the economy have been anything but boring.

With respect to the housing market, we are at a critical juncture. Pundits and so-called experts are lining up on opposing sides of the recovery debate. Optimists will point out that after historic price declines, affordability is at all-time highs and government support for the housing market has helped mitigate the negative effects of tightened credit and mounting foreclosures. The bottom, they say, is in.

Meanwhile, pessimists urge caution. Foreclosures continue to rise, more borrowers are falling behind and the government is considering removing some of the programs that have kept interest rates low.

Ultimately, both arguments have merit. But they both miss the point.

Take another look at the graph above. It’s no coincidence that during the time of most uncertainty in the stock market (2008), the housing market experienced its steepest declines. It’s also no accident that the recent bottom in stocks (March 2009) matches almost exactly with the turning point in housing.

The answer to the riddle is simple: Confidence.

In a new book called This Time is Different, economists Kenneth Rogoff and Carmen Reinhart dissect hundreds of years of financial crises and try to assess how societies keep getting themselves into the same mess over and over again.

A common thread in the discussion, specifically surrounding debt crises like the one we experienced (and indeed are still experiencing), is the notion that confidence plays a far larger, and far less understood role in economic panics than most people think. According to Rogoff and Reinhart: “Economists do not have a terribly good idea of what kinds of events shift confidence and how to concretely assess confidence vulnerability.”

Since most people equate the stock market with the economy, swoons on Wall Street send the message that all is not well with our economic future. Accumulate enough of these swoons and confidence gets punctured to the point where people start acting differently. As risk aversion grows, consumers delay purchases, businesses delay expansion and banks stop lending.

In March of last year, the housing market was beyond bleak. Liquidity dried up and buyers were terrified. Ditto on Wall Street. But as stocks recovered through the spring, hope emerged that maybe the worst was behind us.

Now, as the recent surge in stocks is tested, so too will the surge in home buying: The two are far more linked than most understand.

This post first appeared in the February edition of: Cirios Trends: In Search of Real Estate Opportunities.

Doing Your Real Estate Homework: The New York Times Rent vs. Buy Calculator

A common question for all first-time home buyers is -- Does it make sense for me to buy or rent?

It’s likely that you’ll receive as many different answers to this question as people you ask it to. The majority of Realtors are going to tell you it’s a great time to buy because interest rates are low and numerous media outlets are reporting that the US is at the tail end of the recession. At the other end of the spectrum, there are people who feel like it never makes sense to buy and that you will always come out ahead financially if you con-tinue to rent. The reality is that determining if it’s a good time to buy requires a full review of the buyer, from their finances to their life goals.

Most first-time home buyers want an easy, non-intrusive way to figure out if it’s the right time for them to buy. Cirios has searched the Web for the best rent vs. buy calculator that combines ease of use with a valuable output.

The one we recommend can be found on The New York Times’ website. The basic form of the calculator only requires 5 inputs (Monthly rent, Home price, Down payment, Mortgage rate and Annual property taxes) to give you a reading on when (if ever) buying is better than renting.

Here are our tips and precautions regarding this calculator which will allow you to get the most out of this web-based tool:

Use a rental rate for a home similar to the home you are looking to purchase. If you input the rent of your one-bedroom apartment and want to see if it makes sense to buy a 3-bedroom home, the calculator will tell you it’s never a good time to buy.

Do not use an annual home price appreciation of more than 3%. At this point, its unreasonable to expect more than 3% annual appreciation.

Use a higher than a 1% increase in annual rent increase/decrease. If you are thinking about buying a home, it is likely that you are looking to upgrade your current living situation. If you don’t buy a home now, over the next 10 years you are very likely to be renting a larger home. As a re-sult, you’ll probably be paying more than just your standard 1% rent increase.

(NOTE: There are advanced settings on the right side of the calculator which allow you to make the calculator more reflective of your personal situation.)

Source: Cirios Trends -- Getting to the Bottom of the Housing Market