Housing Bubble – Buy Today and Regret Tomorrow

January 2, 2007  – All over the country hundreds of thousands of baby boomers are like anxious runners at the starting gate. Although poised to buy a home in a retirement community, many are paralyzed by disturbing trends in the nation’s real estate market. The biggest paralysis comes from the understandable fear that they will make a mistake – buying too soon and watching their investment fall in value as the market continues to decline.
The experts all agree now on a few things – real estate prices have come down and sales are off drastically vs. year ago. In fact, due to the existence of hidden incentives, prices are actually worse than reported. Troubles in the sub-prime credit market have also been in the headlines recently – there is serious concern as many of these finance companies go bankrupt that foreclosures and a sell-off will ensue. An impact perhaps more serious than that on prices will be new rules and conditions that will make it more difficult for new borrowers to get their loans approved.

For an extremely interesting podcast on the troubles in the Florida condo market, listen in to this March 30 podcast available from NPR: http://www.npr.org/templates/story/story.php?storyId=9237368

Some facts and figures from all over :

• Fixed 30 year mortgage rates are down slightly vs. year ago – 6.16 vs 6.35%
• Prime rate at end of March 2007 is up .5 pts vs. year ago – 8.25 vs. 7.75%
• February 2007 housing supply stood at 6.7 months vs. 6.6 months in January. The supply was less than 5 months in 2005.
• Sales of existing homes in February increased 3.9% from January, but were 3.6% behind year ago levels
• Year to date foreclosures through Nov.2006 showed a 68-percent increase, with 120,334 properties nationwide in some stage of foreclosureReal estate price factors for you to consider
  But here is where the debate gets interesting: Will prices come down further, or has enough blood been shed that now is finally the time to buy? Every economist worth his PhD has an opinion, and they all consider many important factors. Some of those are hard to predict, so we will mention some here for your own deliberations:

  – Interest rates – slightly higher than a year ago. If they go up, that is bad news for sellers. Interest rates go up and down with the economy, so any bet on them has to figure what will happen to the overall economy. Interest rates will also affect how consumers handle their all time high levels of indebtedness – the more they have to pay in interest the more likely that there will be defaults.

  – Speculator pressure. A lot of the excesses of 2004 and 2005 can be pinned on speculators’ dreams of annual turns of 20% or more. Recent price declines mean that some of these speculators in certain markets are under water – their condos are worth less than their equity stake in them. When that happens many of them will default. How long can they hold on, particularly if interest rates go up, is the question.

  – New condos coming on stream. There are 22,000 new condos becoming available in Miami in the next few months, with many more than that announced for 2007 and 2008 delivery. Meanwhile there and in other parts of South Florida, new sales have stalled. According the New York Times, condo sale prices in Panama City, Florida dropped 28% in the 3rd quarter of 2006. That new supply does not bode well for prices.

  – Herd mentality – possibly the biggest factor. When baby boomers collectively decide that it is safe to buy, there will probably be another sales boom with attendant hefty price increases. But someone or someone has to spook the herd into that decision. Likewise the sellers herd is also spooky. Right now that herd thinks that prices aren’t going to go down, so they are hanging on and accepting only modest decreases in prices. The scary thing – no one knows which way either herd will go.

  – Auction prices. Much has been said about recent auctions in Florida and other parts of the country which had experienced dramatic run-up in property values. Whereas the economic reports have tend to announce single digit percentage declines in prices for the housing market, recent auctions revealed the average home was worth about 20% declines from 2005 values. In some experts’ minds, these auction sales are a more reliable indicator of the true market.

  Some advice from Topretirements.com
  As you can see from the foregoing, no one really knows what is going to happen. There are just too many factors at work. That being said, here is some advice from the editors at Topretirement.com.

  – Look for quality. Quality in the community, the neighborhood, the property. The people who tend to get burned the worst are those that buy something marginal – those markets tend to disappear in times of trouble. One measure of quality in a community is the value of their development plan. If a town is having a resurgence because it has a solid redevelopment plan, that bodes well for the future. If it has no or just a sketchy plan, beware. If it is a development, what kind of track record and resources does the developer have to weather a downturn.

  – If you find the right place, buy it – if the price seems reasonable and your time horizon is broad. Prices have come down from 2005 so you should be able to get a better deal than the last buyer made. Don’t miss out on a really great place for a few thousand dollars – if you are in it for the long haul.

  – Negotiate – and be prepared to walk. If your seller just isn’t reasonable, keep looking. There are lots of properties out there.

  – Try to take emotion out of the equation. If you are buying because you are afraid you are going to be shut out of the market, be careful. Likewise don’t forget to factor in how much it costs to complete a deal and own a home – particularly if you are not going to use it much. However, if you need somewhere to live and you feel like your choice is solid, you can be more resolute.