Here’s one pledge to you I’ll make:
I won’t sell you on buying a home.
I can walk you through the advantages and benefits as well as anyone, but if spending $24,000 a year and not having anything to show for it “feels” like a better idea in light of your past experience… I can’t say anything to that. It very well might be a better decision, and no, there is no tongue in cheek here.
My industry is really good about being totally fearful of what is
going on, or under-estimating what has gone on. But I do not think that the real estate industry is very good
with being honest about what has gone on.
There are people in Colorado Springs who wrote contracts on new homes in the summer of 2005. In the summer of 2005, this local market like many others operated in a dreamland. The economy was rocking. Interest rates were low. Everyone was buying houses, selling houses and making money. Because builders were so backed up and did some bad planning, the slightest governmental oversight could slow an entire project down to a crawl. This is what happened in Flying Horse. If Classic had their act together, they would have understood their utility problems ahead of actually opening Flying Horse. They assumed the city would bow to pressure like they always did, or maybe consumers would just buy homes without basic services. Maybe they thought the problem would cure itself, or just fix itself in a matter of weeks. Instead, it took months. Because the city made Classic actually create the utilities distribution network for Flying Horse before writing a bunch of contracts and the demand for this neighborhood was huge in summer 2005 from the kinds of buyers you want to move into your neighborhood (upwardly mobile professionals attracted to the awesome master plan and the K-12 school campus), Classic massively messed their own bed. They expected city cooperation that the city wouldn’t provide, and correspondingly, they missed the perfect market. That was step one in a series of very bad dominoes.… Flying Horse had demand but no ability to deliver on it. Eventually, these buyers went elsewhere. Fast forward six months… The first deliveries start in Flying Horse and the utility problem is fixed. They can now start delivering homes. But some people wanted something 60 days ago. 90. They had bailed. All the builders in Flying Horse are now building homes because it was such a demand place this past summer, but demand is slipping away from those prime, stable consumers. The buyers they wanted, relocating or locally professionals with big down payments… they bought elsewhere. In late 2005, Flying Horse was building supply for an anticipated demand rebound that had already moved on. When they began delivering complete homes and they weren't selling, they had to jump into a different mode altogether. What to do? Call Lehman Brothers. They have a loan for everything. We didn’t have many neighborhoods impacted by “investors”, but from March to August, 2006 we did have waves of them hit Wolf Ranch and Flying Horse and start gobbling up inventory on 100% investor NINJA loans (no income, no jobs or assets). They worked typically with national builders, but also Classic Homes, our biggest local outfit. These “investors” were really just speculators, people buying real estate because real estate always went up in price. They would buy, get a renter in it on a loss for 6 to 12 months and then resell it. Many “flipped” their house right after they closed, never occupying or renting it because prices had gone up $35,000. Do you think that was what those stable, primary residence, never-move-again-because-we-have-our-club-and-k-12-school-homeowners wanted flooding their neighborhood?
This is all obviously unsustainable. But no one really believed
it. Everyone was so drunk with the fever of buy, buy, buy and value will go up
forever that there were zero concerns about fundamentals. Well here is a
concern: when 50% of your product offering is sold to speculators with no skin
in the game and their name is spread out on 15 to 20 deeds across the country
and their kids don’t go to that school… do you think they care if they get
behind and they lose the house? Is that a little different than the early
adopters who got in on the front side and wanted to close in February 2006 so
their kids could start in the fall of 2006 at Discovery Canyon or Ranch Creek
Elementary? The demand balance was totally out of whack. People didn’t ask
questions like, “if rates are near 30 year lows and I have to do a 3/1
interest-only ARM to break even on this thing… is that smart?” Instead, what
they see is the one other guy who bought at $380,000 and resold for $430,000.
$50,000 in taxable profit. Hey, I make that in six months at work. I'll try it! Worked for him. Let’s do it again. Well it worked
for Guy A because those same buyers couldn’t have Classic or whoever build them
a home fast enough. Demand when the home came do is called a couple things: one is lucky. Another is un-project-able. It didn’t work for Guy B
because that demand: had bought. They were now gone. And now there was supply.
The speculators didn’t ask fundamental questions because they weren’t
personally involved in the outcome. There was an exclusive motive to real
estate: profit. Real Estate is a vehicle that is always, always, always
lousy/risky to make money in the short run and pretty conservative
and excellent at making money in the long-run. It’s still a great tax
shelter, but that’s because the government does know one truth about real
estate: home-ownership leads to better performance in the citizenry. What was
going on in 2006, when 3rd quarter 38% of all new home sales
nationwide were second homes or investor purchases, was that it had nothing to
do with home-ownership. It has one common thread: profit.
Now of course the tipping point has come and gone and the total
other end of the pendulum is being realized. Just as everyone it seemed was
buying for profit motives, now it seems everyone who is buying in 2009 is buying
for shelter needs. This is why the National Association of REALTORS advertising
campaign is such ill-spent dollars.
1.) No one believes the organization that
says "it’s a great time to buy" when that same organization encouraged “buy now
or be priced out forever.”
2.) The buyers buying right now don’t have a profit
motive. They have a shelter motive. NAR is speaking the wrong consumer
language. As usual.
Tons of first-time buyers are hitting the Colorado Springs market and a buyer will have a very hard time finding a decent, clean house under $150,000. In 120 days that will be up to $180,000. It will be a bottom-up recovery that will take 2 to 4 years to be realized in all areas and pricepoints, but it is beginning. The other buyers are people who are getting married, getting divorced, had three kids in the last three years (I almost fit that description!), mom is moving in, dad is moving out, the kids are coming back home, we want to be nearer our kids with the special needs daughter… a totally different demand. It is no longer “I can make a lot of money in real estate by buying and selling” it is “life has gone on and the economy has changed and… we need to do something.” These are people where a change has entered the living room and the present situation no longer works.
Is this a reason to buy?
Maybe. Maybe not. I think it’s important to know why people are
buying right now:
- good inventory
- depressed prices
- low interest rates.
also, life has gone on while the economy has hit the toilet.
- Two hours a day of
commuting would get me to move.
- Three kids in a 2 bedroom apartment would get
me to move.
- My mother-in-law moving in would get me to move (for the better!).
- Being nearer caring parents when I had a child with special needs... I'd move for that.
The first set appeal to profit. The second set appeal to people involved in change. People who buy with the first set must be comfortable with risk. People who buy with the second set must be comfortable for the long-term and with a long-term window tied to their decision. Of the two, the second set is much more sustainable, and better suited to the long-term value of real estate than “maybe you’ll make a lot of money, an outcome which you can not control because buyers always decide market value, and you as a seller use your asking price as a marketing point and nothing else.”
If you the reader are thinking of buying, or know someone who is, here is a Quiz:
- Is the desire to own (if there is one) based
on need or want?
- Obligation or Opportunity?
- A planned, known outcome, or quality of life?