Is it a buyer's market?
Ask most real-estate professionals the above question, and the response will almost certainly be an emphatic "Yes!"
After all, they quickly explain, inventory levels are at all-time highs, sellers are desperate to get out from under their rapidly depreciating homes, and mortgage rates are at historic lows. What more could buyers ask for?
How about not losing their shirts, for starters.
The traditional definition of a buyer's market is one where supply outstrips demand, pushing down prices: Buyers have the upper hand. As the bull market begins to wane, however, buyers lose their enthusiasm and become concerned about price. The market cools down and buyers shy away, forcing sellers to make concessions and lower prices. This, in turn, creates an environment where buyers can shop around, be picky, and patiently waiting for their dream house to come on the market.
As demand returns, sellers start upping their list prices, refusing to pay for closing costs and holding out for a better offer. Buyers, fearful they might miss out on the next boom, bid up asking prices and ask for fewer concessions. Now that sellers have the upper hand, the market favors sellers as prices move upward. Such is the cyclical nature of real estate.
This story has played out for decades as real estate plodded along, homebuilders like DR Horton (DHI), KB Homes (KBH) and Toll Brothers (TOL) supplied the market with new construction and home prices marched steadily upward, outpacing inflation by the narrowest of margins. A little more than 10 years ago, however, that relationship started to come unglued.
The recent housing bubble turned the prevailing view of real estate on its head. Homes, long viewed as the most stable of all assets, became a speculative tool for even the most unsophisticated investor. The mania, fueled by lax monetary policy and Wall Street alchemy, helped contributed to the financial crisis currently gripping our country. As property values have careened back to earth, real estate assets of all kinds have become toxic.
Nevertheless, the National Association of Realtors (or NAR) and its dedicated minions have tirelessly peddled their lies that ours is a buyer's market. Let's take a quick jaunt back in time to some recent headlines and where that traditional assessment of a buyer's market got us:
Las Vegas: It's Definitely a Buyer's Market
USA Today: July 5, 2006
"Real estate looks like one of the biggest gambles in Las Vegas."
How true. Property values in Vegas have fallen 33% since summer 2006. Not to be outdone by their peers at USA Today, ABC ran this piece just weeks later:
Take Advantage of Real Estate's Buyer's Market
ABC News: July 31, 2006
"The National Association of Realtors said that the number of homes for sale has reached new heights, which is good news for buyers. After years of a seller's market, it's finally a buyer's paradise in Phoenix, AZ."
Anyone who bought in that "buyer's paradise" in Phoenix has seen their home's value fall by more than 30%.
The point isn't to criticize realtors for arguing it's a buyer's market: After all, one should expect nothing less from a group whose entire existence is based on convincing buyers it's a great time to buy - irrespective of the truth. Just ask Gary Keller, whose new book, Shift: How Top Real Estate Agents Tackle Tough Times, advises agents to "find every way possible to overcome the media-driven real-estate malaise."
The traditional definition of a buyer's market needs a bit of a makeover. A more sensible definition is a market where buyers have ample opportunity to make good investments. To be sure, a home is more than just an investment; it's a place to raise one's family, to grow old, to spend time with loved ones. However, as far too many American families have learned in the past three years, homes can become a debilitating burden if bought at the wrong price.
In today's market, there certainly exist attractive investment opportunities. But to label the market as a whole as one where buyers should be rushing out in search of the American Dream is borderline lunacy. Throughout much of the country, home prices are still too high: Real incomes don't support prevailing property values, even after the historic declines we've already seen. Supply, despite remaining at record levels, is likely to remain so for the foreseeable future. Home prices are undergoing a much-needed correction, and will continue to do so until fundamental demand catches up with supply.
This isn't to say every home on the market is overpriced, or that every buyer in the past 36 months has gotten a raw deal. There are deals to be had if one knows where and how to look - and, most importantly if the purchase makes good financial sense. To borrow a theme from Toddo, "financial staying power" should be at the forefront of any prospective buyer's mind.
So ignore the hype, both good and bad. As often is the case, not until the most ardent bulls turn in their horns will the bears return to hibernation. So, as soon as realtors concede it may not be a buyer's market after all, voila! A bottom we will have.
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