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.

Renovate or Buy New, Part II

A couple of years ago I wrote a blog post about how a person could decide whether to renovate their home or buy a new one. Well, it turns out this is by far the most popular search term for people who find their way to this blog, so with that in mind I thought it was probably time to expand upon the original post.

Here are a few more things for people who are trying to make this decision to think about:

1. A good rule of thumb for how much you should spend on a renovation is, do not renovate if the cost exceeds 30% of your home's value. More than that and you are in "overimprovement" territory and you may find it difficult to recoup the value.

2. You should consider the neighborhood. Renovations will show more ROI in some neighborhoods than others. If others around you are renovating their homes, it probably makes sense to renovate yours too. If other homes around yours are not being kept up, you will probably find it more difficult to get a return on your renovations. So, compare your home to the surroundings. Also, find out if there are any changes, such as new construction, road expansions or zoning changes, coming to your neighborhood. A call to your city or county planning department will only take a few minutes but could save you money in the long run.

3. Remember that renovation or remodeling is not the same thing as maintenance and upkeep. Maintenance and upkeep includes things like repairing a roof, new exterior paint, etc. These are just part of the cost of owning a house and do not usually add value to the house. Renovations that are mostly cosmetic, such as installing new flooring, also do not necessarily add value. However, adding additional square footage to your home or adding to the functionality of your home--for instance, upgrading a kitchen--typically do add value.

4. You need to look at what the market is doing. If the market is appreciating, you probably will be able to recoup some or all of the costs of your renovations as long as you choose them wisely. If the market is depreciating, this will be more difficult.

5. Consider the factors that a buyer would look at when evaluating your home. Are the schools good? Is the neighborhood generally good? Would a buyer pay more for a home in your neighborhood with the planned renovations? For instance, in some new construction tracts or condominium complexes, homes tend to be pretty similar, and they typically sell in a certain price range. When buyers are looking at the homes, they will compare your home to others that have sold. In neighborhoods like this, it's harder to recoup the value of renovations than in neighborhoods where the homes are more diverse. Older homes, even if they were originally tract homes and fairly similar, will typically show more diversity over time and it is somewhat more likely that you will be able to find "comps" to support your new price.

6. Most importantly, does your home fit with your lifestyle overall? Ultimately, the best renovations are the ones that make it possible for you to enjoy your home now and for several years to come, while still adding resale value when you are ready to sell. Sometimes, we just outgrow our homes and the renovations we perform simply forestall the inevitable. If you think this may be the case, it probably makes sense to consider a move.

Real Estate Vocabulary

In honor of studying for my Broker's Exam, I thought I would write an entry about the vocabulary that really is used in real estate listings. These are not the legal terms that all agents and brokers are required to learn for their state licensing requirements, rather, words that are used in the marketing of our listings on a regular basis.

This vocabulary is intended to help the average consumer understand what they see in our listings just a little bit better.

Without further ado:

A

Approximately XXX square feet - We have no idea how big it actually is.

B

Beautiful - The most overused of all Realtor terms. Means "I lacked inspiration and I read somewhere that using the word 'beautiful' will inspire buyers to pay more for this house."

Big enough for the whole family -As long as it is a family of mice.

C

Custom - Seller had it built/installed himself. You will probably want to tear it out/down.

Cute - Small. Very, very small.

D

Den - The oddly-shaped, windowless room under the stairs.

Designer Paint - Not white.

E

Elegant - Everything the seller owns is in storage right now.

Exquisite - Similar to "Beautiful."

F

Finishes (as in, "top-quality finishes throughout") - Normal people refer to this as trim or woodwork. May mean that the seller bought a $15 door trim kit and installed it himself, then added $1,000 to the price.

First-Time Buyers (as in, "Attention First-Time Buyers!") - People with no money, willing to live anywhere.

G

Garage - This is the room that your cars may or may not fit into, after you load it up with all of your stuff.

H

Handyman's Special - Tear down that may actually be falling down. Get an inspection.

I

Investor's Dream - Cheap. See Handyman's Special.

J

Just Listed - This house has been on the market for three months. Please buy it before the seller fires me.

K

Kitchen Upgrades - The garbage disposal (refrigerator, diswasher--insert your appliance of choice) crapped out and the seller had to buy a new one. And he would like YOU, Mr. Buyer, to double his money.

L

Lots of Upgrades - We painted.

M

Many Upgrades - We had the carpets cleaned.

N

Natural Setting - You have to go 10 miles down a dirt road to get to it, if you can ever find it.

O

Open Space - The county won't let me build on it but is taxing me for it anyway.

P

Pastoral Setting - See "Natural Setting." Think of the movie "Deliverance."

Q

Quality (as in "Quality Finishes") - Home Depot special.

R

RV Space - We paved over our entire yard.

S

Seller is motivated - Desperation, people. It's not pretty.

Staged - The listing agent made the seller get rid of his stuff, and also his 30 cats.

T

Truly (as in "Truly beautiful") - I had some extra space in this ad, and nothing else relevant to say.

U

Unbelievable - This one depends on context. If it says "unbelievable view," the house probably has a pretty good view although it may or may not be obstructed. If, however, it just says "Unbelievable!" that usually means that we're hoping you won't notice that the roof is about to cave in. It's only unbelievable because you won't believe someone would actually list their house for sale with it looking like this.

V

Value-Priced - House has nothing going for it except a low price. See "Handyman's Special."

W

Well-appointed - The seller is taking everything with them.

X

Extra Large - Average size.

Y

Why Wait? - Frequently seen on new construction. Means roughly "We're lowering the price in a week." You should wait.

Z

Zilch - Hey, I did pretty good keeping this up all the way until the end but I can't think of anything for Z.

This list is mostly for fun, but I also wrote it to let buyers know that sometimes, words don't mean what they seem to mean. So, read carefully, and to get the most from your home search work with a buyer's agent who previews properties for you.

This is also an admonition to those of us in the business to remember that a lot of these words are overused, and in some cases are not understood the way we meant them, so we must choose our words carefully!