Let's Get Real About the Housing Market

This post by "The Mass. Mouth" Michael Freedberg sums up quite nicely I think what is currently going on in the housing market in North King and South Snohomish counties. Freedberg is based in Massachusetts, but his observation could be applied to anywhere that is experiencing similar market phenomena.

The Mouth's supposition is that in a changing market, the reason prices will initially be observed to rise even as time on market and number of homes being sold is shrinking is because when the market changes, only the best homes on the market will sell.

He said some other things I didn't agree with as much, but this explanation of why prices are still rising as inventory creeps up along with time on market, did make sense to me.

This is certainly what I have observed in my neck of the woods. Currently, we have more homes on the market than buyers looking to purchase. So, buyers have their pick from the cream of the crop. That just means that if a home comes on the market and is not the best one in its price range, it ain't gonna sell. It's got to compete and win in order to sell. It's really as simple as that.

Now, a couple of years ago, quality didn't matter as much because buyers so heavily outweighed sellers. I think in some places such as close-in King county we're still seeing this kind of market, though even there things have slowed a bit. But here in the outskirts (North King and South Snohomish County) what I'm seeing is pretty much what Michael describes: the best stuff sells, and the worst sits on the market until price reductions finally cause it to move or sellers take it off the market.

So then the question is, "why am I talking about this?"

Simply because--and I wish the National Association of Realtors would realize this--you can't fight market forces by pretending they don't exist. It's best to understand and accept what the market is doing, and then plan your strategy accordingly. No matter what the market may be doing, there is a winning strategy. Usually, that strategy is to do the exact OPPOSITE of what the rest of the herd is doing.

Market forces are a lot like a mob, they move on momentum. Once momentum gets going, it's got to run its course. Which it will do in time. There's no need to panic when it comes to observing market forces in operation. What I am constantly telling people is that it's okay if prices come off last year's highs--they have to if normal people are going to be able to afford a home in the future.

15% appreciation every year (or more) is not normal--not unless we all start getting 15% raises every year. Normal appreciation is a rate that outpaces inflation, but not by a lot. Back in the day when I took economics in college, we were told that 5 - 8% return on real estate was pretty good. Stocks should be in the range of 8 to 10%. However, these are rates of return over time--the way it looks in reality is typically that prices go up fast, then drop back or level off before they go up again. If they go up a lot, they can drop back a lot--or they can be stagnant.

In areas where there is a lot of in-migration such as Seattle, I would expect stagnation rather than price declines, but it depends on a variety of economic factors. If something happened to shift the supply of jobs elsewhere, then, obviously I would be more concerned. But in general our overall economy in the area is good. Therefore, people will be needing a place to live.

Given that, I would not expect to see a mass exodus out of the housing market given that the pool of rental properties has declined over the last few years (condo conversions anyone?) so renting is not really that great of an option at this time. Rents have gone up significantly along with housing prices and of course, the law of supply and demand dictates that if demand for rentals goes up and supply doesn't meet the demand, then prices for rentals will also increase.

So it's natural for markets to move up or down. The thing that is important to keep in mind, is that they usually recover. Supply and demand will eventually bring a market back to equilibrium. A healthy market is one where neither buyers nor sellers have too much power, and neither supply nor demand is too far out of whack. In fact you could say that we are recovering right now from a market where sellers had too much power, and buyers didn't have enough.

The only time markets don't recover, is when the need for the thing that is being bought and sold goes away. I don't think the day will ever come when people won't need a roof over their head.

No matter what happens, I believe that home ownership will always be an important goal for most people. And like Scarlett OHara, I believe that a piece of land is the most important thing you can own, because it gives you roots. As the child of a life-long renter, owning my own home is an incredibly significant achievement to me. It represents stability, faith in myself, and faith in the future.

I also believe that it's a sound financial move for most people, most of the time.