As we begin our 2007 Fall PARADE OF HOMES annual event, we had about 1,000 people in our 7 model homes this past weekend. Oh, there is always the "paint color" and "decorating ideas" shoppers, but by and large, the vast majority of the people we met have a desire to purchase a new home in the next weeks or months.
Our typical client has live in their home for 5-15 years, and has noticed a lot more for sale signs hanging around their neighborhood this year. The folks with signs in their yards do not give a lot of glowing reports on the process or progress either.
Questions/Comments:
- Why aren't homes selling? And the ones that do sell seem to take so long.
- Is the price of real estate falling? Has that ever happened before? I thought real estate was a good safe investment.
- Why would anyone buy a home in this terrible market condition? Let's wait it out.
To answer these questions, we will (try to) leave emotion out of the way as much as is possible. I will offer some facts that may contradict some headlines - for good and bad. We will consider some conventional wisdom played against what seems to be true at the street level. Here we go.
1) Homes are selling, and the homes that sell do not take very long to sell.
On any given day in the Twin Cities metro area, 200 - 400 +/- homes are sold and closed, and it happened quickly and for near asking price. Facts:
| Zip Code |
Days on Market |
Selling price % of ask |
| 55432 |
58 |
97.4% Fridley |
| 55433 |
68 |
99.2% Coon Rapids |
| 55311 |
66 |
97.7% Maple Grove |
| 55422 |
51 |
98.4% Robbinsdale |
| 55443 |
59 |
98.1% Brooklyn Park |
| 55126 |
65 |
97.5% Shoreview/North Oaks |
| 55112 |
66 |
98.0% New Brighton/Arden Hills |
Source: R-MLS Market watch report - 2nd Quarter 2007.
MESSAGE:
Homes THAT SELL do so rather quickly, and for about full price.
LESSON:
A nice home, priced right, always sells in a short time if marketed well.
OBSERVATION:
The free market is amazingly efficient at bringing real buyers together with motivated sellers. Commodity booms are known to bring buyers/gamblers/speculators/dreamers together with sellers and they will ultimately bid up the commodity to a frothy bust. The top 1/4 or 1/3 of the "head on the beer" glass will always settle back down to the actual fluid level. 2005 and early 2006 was just the foam at the top of the mug. It is gone now. face up to it. The free market is doing just what we all want it to do (to our neighbor anyway) and correcting excesses.
2) Real estate prices have come down, and are always in a state of flux. Real estate ebbs and flows, and over time, in a good location, with a healthy economy, will return 3% - 4% annual returns - OVER TIME.
If you are honest about things, most residential real estate you have owned proved this true. Oh sure, from 2004-2005 a few "gamblers" made some money flipping a property in the sunbelt somewhere, but that is not normal, nor long lived. Like any investment, returns are better some years, negative in others, and fairly steady when looked at in 5-10 year increments.
Our new homes have come down in price almost 13% in the past 12 months. This has been through a combination of reduced costs of labor & materials, engineered savings in structure & design, and reduced profit margins.
MESSAGE:
Real estate prices have come WAY down from 2005 peak.
LESSON:
If the everyone at the block party is saying they are excited about how much their home value has increased this year, we are probably at a market top.
OBSERVATION:
As national and large regional builders have driven prices down in new construction it has now put pressure on resale homes. Held for 5 years or more, real estate continues to be a good, conservative, safe place to earn low single digit returns while enjoying a nice place to live.
3) If you are a move-up buyer (new home more expensive than current home) you will not find a better time to sell-buy a home.
This is where contrarian thinking is needed. If, and it is a big IF, you can find a nice home for sale you like, AND the SELLER IS REALISTICALLY PRICED TO SELL, grab it. Assuming that the market has adjusted by a % amount, (let's say 10% to keep it simple) then your $350,000 home should be down $35,000, and the new $750,000 home is down $75,000. Why wouldn't that be good for you? Funny, when the opposite was true in 2004 (that the market had appreciated 10%) buyers were stampeding to get in to our models to pay us $75,000 more for our new home because they could $35,000 more for their resale. You explain that one to me.
MESSAGE:
Just like in the stock market, the best time to buy is when everyone else (conventional thinkers) are saying you are crazy to do so. Just ask Warren Buffet.
LESSON:
When buying AND selling a home, the difference is the ONLY number that really matters. Find the BEST PROFESSIONAL you can and follow their advice. Don not use your cousin's roommate's brother-in-law because he is nice and will do a cut-rate commission - you will get cut-rate service at best.
OBSERVATION:
Most people in the home market cannot see past the value, or hoped for value of their current residence, and are so emotionally involved with their residence that they cannot assess its reasonable value nor can they consider the whole transaction cost. For some reason, we all think our home is worth more than every other home on the street.