Sunday, October 26, 2008

Lessons Forgotten are Lessons Learned

Sellers today have a particular challenging decision to make, "Do I sell or do I sit out the market and wait for a more opportune time?"

Today's Arizona Republic
noted that property prices/values in the Valley have retreated from the gains realized during the boom days of 2003, 2004 and 2005 backward to a pre-boom era. Some Valley communities are seeing property values/prices retreat to those of 2002/2003. These sobering realities heap a very interesting set of scenarios on today's Sellers and Buyers.

As a Seller, consider the following:

The challenges Sellers face today is that most of the inventory Sellers compete against is foreclosed and/or Short Sale inventory, which in turn pulls the property values down in their neighborhood.

Being both a Buyer and Seller produces a double edge sword. On the one side, if a Seller is going to get in and stay in the game, the Seller will sell for far less than they had expected. The reality is... when the market finally corrects itself, property values will begin their slow and steady climb upward. But… keep this point in mind, once that upward swing begins… and it will begin… sometime in the future… perhaps as early as the second ¼ of 2010… if Maricopa County re-establishes her statistical bellweather appreciation curve of 3.5% to 4% per year, a property that would be valued at $265,000 in 2010 could be worth about $310,000 in 2015. The question that must be answered by today’s Seller is, “Am I willing to wait 5 to 7 years to capitalize on the equity I will build in my home over that period of time, or do I cut my losses… in my current home… today… and target a purchase for… perhaps less capital investment and then deal with the same upward appreciation curve described above?”

As a Buyer, consider the following:

On the other side of the sword blade, a Buyer or Seller (turned Buyer) can capitalize on the pain of the Seller they purchase from, ultimately making a purchase of their next home for much less than that Seller thought they would sell for and in all likelihood for a price that could never have been attained only a few years ago. Perhaps equally important is the very real probability that the home purchased today, may indeed, devalue a bit more before the market corrects itself. Some market analysts project that the real estate market will "over correct" to the bottom and beyond, before making a swing back upward. One thing is certain, no one knows where the bottom is!

Unfortunately, there is no clear cut answer to these and other questions. Each Buyer/Seller must weigh their own investment portfolio and then decide for themselves, which direction to go. "Do ya hold-em or do ya fold-em?"

Before I close I ran a few numbers through the G2-O'Meter and here's what I pondered.

Mr. Buyer today wants to buy his first house. He has his eye on a charming little bungalow priced at today's market value of $150,000. Mr. Buyer earns $50,000 per year. He is unlike the majority of first time Buyers today and has saved $20,000.

He can secure a loan for 6.5% bringing his PI to $855.00. His TI will be $150 and his MI will be about $80 bringing his total PITIMI to $1,155.00. His DTI (Debt to Income) ratio is 28%, well within Fannie/Freddie/Sally/Ginny lending guidelines. Mr. Buyer has a modest car payment, one for each of his modest automobiles, only $300 per month for each auto. He has minimum credit card debt, only $200.00 per month. Therefore his total committed cash out each month is $1,955, not including his cost for fuel, food, insurance and disposable income. Therefore his total cost of living, month to month, including his new house payment will be right at $3,000.

Now... let's put Mr. Buyer in his new home. He has exhausted his savings account because he had to put a minimum of 10% down ($15,000) and he had to pay his own closing costs, about $5,000. Mr. Buyer has NO cash reserves any longer. His total monthly cash outlay is 73% of his monthly income. What if he gets sick? What if his wife gets sick? What if his children get sick? What if his health insurance deductable, if he has health insurance, is so great that his cash outlay exceeds his income? Can he continue to be the frugal saver he was before he purchased his home?

I postulated this scenario to demonstrate where our real estate market may be heading. Do you think that it could come to pass that our nation re-visits the philosophy of our grand parents, wherein major purchases were made, ONLY if you had the cash to make such a purchase? Do you think if our national mindset takes this road, that Buyer's of real estate, could put off their purchase until they have enough of a cash reserve to sustain an unexpected "perfect storm of life"?

I don't know the answer and I'm not sure anyone out there does, but what I am certain of is... we're in for a very different upcoming decade or two. A few decades of frugal living and thrift spending. Do you think the Real Estate Industry might see our ranks shrink as those agents who got in the business of late run for more stable income producing platforms? If we do see a shrinking of our REALTOR ranks, do you think there will be enough business out there to grow our business? To the last questions, I am convinced the answer is Absolutely YES!

For those of you reading this BLOG post, who are not real estate agents, lenders, appraisers or home inspectors, you may find some component of my post that will lend itself to your own profession.

I believe that the questions raised are good ones. I believe we must all take a good hard look at where we have come, what we are going through and then set our sights on how NEVER to have to endure this kind of damage again. The first time this happened, "The GREAT Depression" our country was still young. She had never seen an economic down turn like that. The shame of where we find ourselves, as a nation and as individuals... today... is that we lost sight of what our grandparents learned and what they taught our parents and what our parents tried to teach us. We must learn this lesson this time so that our children and our children’s children never have to walk in this pit of fire again!

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at