Real estate normally appreciates one to two percentage points above inflation, but between 2001 and 2005, real estate increased 50 percent, an abnormally high return that benefited homeowners and sellers across the nation. Then in 2006, prices and sales began to return to a more normal rate of return, but still far from historical norms resulting in the third best year for real estate sales ever.
What Causes Housing Price Declines?
Real estate normally appreciates one to two percentage points above inflation, but between 2001 and 2005, real estate increased 50 percent, an abnormally high return that benefitted homeowners and sellers across the nation.
Then in 2006, prices and sales began to return to a more normal rate of return, but still far from historical norms resulting in the third best year for real estate sales ever.
It was the first year of national median price declines since the National Association of Realtors began keeping figures in 1968. And the NAR predicts that 2007 will also be a year of decline, which raises an interesting question — what causes home prices to decline? Are buyers being pushed to the sidelines by the media or fundamentals?
First, there is no "national" market. Sales figures must be local in order to be meaningful, but that doesn’t mean that buyers don’t retreat out of fear as well as market realities such as job loss, population outflows, and overbuilding.
According to the Joint Center for Housing Studies of Harvard University’s "State of the Nation’s Housing 2006," overbuilding and job loss are preconditions for metro area housing price declines. Between 1975 and 1999, the percent of times that overbuilding and major employment loss led to price declines was nearly 8.3 percent and 4.5 percent, respectively.
Yet, buying conditions after 1999 changed:
Significant baby boomer wealth was poured into upsizing homesteads and purchasing second homes. GenXers came into their own with white collar jobs and stock market gains and were able to buy homes with less money down due to generous loan programs never before provided by lenders to previous generations. Government subsidies continued in the form of low interest rates, hovering at 30-year-lows since 1998. Homebuyer demographics also changed with more households forming, including record legal and illegal immigration. Single women homebuyers are now 22 percent of the market, up from 15 percent in the 90s.
By 2005, one in ten homeowners owned a second home.
Those positive conditions haven’t changed, but homebuyers are moving to the sidelines nonetheless, most likely in reaction to double-digit price gains in many metro areas. Not only did affordability hit a wall, particularly in California, but buyers simply lost patience with ever-escalating home prices. That’s when a variable comes into play that has nothing to do with fundamentals — attitude.
Wall Street is on a roll with a record-flirting DOW, jobs are up, inflation appears to be under control with Federal Reserve rates standing pat, mortgage interest rates are low, and new home-building has slowed significantly. Each of these is a strong buying signal for housing, yet, encouraged by the financial press and Wall Street pundits, buyers are being told to force home sellers’ prices down, even in areas that sat out the boom. And it’s working — prices are down for the first time since 1968.
Dallas home appreciation has been under the national median for over 15 years, so it hardly cashed in on the recent boom, and while many investors already recognize Dallas as undervalued, others want to punish sellers. But are they cutting off their noses to spite their faces?
Realtor Mary O’Keefe says one of her clients refuses to take her advice when making offers. He prefers to listen to his Wall Street buddies who don’t live in Dallas and aren’t familiar with sold comparables. "They’re telling him that he should offer $50,000 less than the asking price," says O’Keefe, who has been showing the buyer townhomes. "Consequently, he’s lost out on two great properties with low-ball offers, but he just won’t accept that it’s his expectations are unrealistic, not the sellers. Properties are selling out from under him."
Some buyers aren’t going to be happy unless the seller’s blood runs in the streets. It’s about winning, not buying a home.
Common sense dictates that when prices decline, that’s the time to jump in. It’s why consumers love department store sales, year-end car and truck clearances, and stock market fluctuations. Buy low and sell high is what we all wish we could do, even if we don’t buy in at the lowest low or sell at the peak.
For home sellers, the name of the game may simply be patience. There’s a point when others begin to recognize a good deal and they’ll make the offer that the seller will accept. The more that happens, the closer the market is to turning from a buyer’s market to a seller’s market.
Realtors working with buyers should be letting their clients know a basic economic fact of life: if fundamentals aren’t supporting a market decline, then it’s not going to decline for very long. If the nation and individual communities are adding jobs and population, a market decline is destined to be short-lived.
Price is a legitimate concern, but with growing inventories, buyers should be taking advantage of an abundant selection to improve their vantage points. In other words, you may pay a little more for the house on the hill, but think of the alternative. In a seller’s market, pickings are slim and if you want to buy, you take whatever’s on the market. There’s something to be said for getting the best home available for the money in a buyer’s market. It’s about vantage point.