Okay, I want to try to do a little brainstorming here. Let me lay out what I’m thinking….
I had a conversation (about an hour and a half long) with a local Realtor who has been in the business for over 20 years. We were talking about the current state of the housing and financial markets. She made a comment and raised a question that I’ve got my own thoughts on, but I’d like to hear from the collective wisdom of the group.
The comment that she made was this: “I think that the majority of our clients and consumers as a whole don’t have a clue as to what’s going on in the economy, what’s going on in the housing market and what’s going on in the banking world.”
The question she had was: “What can we, as Realtors and lenders, do to educate and inform people in our markets so that they can wisely navigate through the market that we’re in?”
That got me thinking, are we, as the professionals who really understand (more than most) what’s happening in the market, really doing what we should to help people who want or need to either buy, sell or refinance in today’s turbulent markets?
I’d love to hear what the group has to say. What are you doing? How’s it working? I’m hoping we can raise the bar for all of us and help us all be better advocates for our clients.
What do you think?
Thanks in advance,
Tom Vanderwell
Bob says:
Many agents don’t have a clue and many agents care. Their biggest concern is the next deal. Being an advocate in this market frequently means advising a client to wait and that frequently is a financial conflict of interest.
In my market, we have agents touting why buyers should jump in now, while the few Bawldguys of the world look at the market and let their clients know that whatever you buy today you can get for less tomorrow.
July 15, 2008 — 10:29 am
Gary Frimann says:
Good post. What’s interesting is that the people I talk to have one of two views–either the market will go up, or it will continue to go down. I think it is somewhere in between…(joking, of course). Well, we know the market probably will go up, with inflation being an inherent part of a capitalist economy. Housing is based on affordability. If one does not get on the carousel now, they will probably miss out down the road. Money is made over time, not overnight, so if one is buying a house to live in, over the next few years they should do OK. The cost of building new homes will certainly be going up, as every component of a new home will most likely increase in cost. Over the big picture, and historically, prices will rise. People are too worried over the potential of the possibility of losing a few dollars, they cannot see the forest from the trees.
My car lost 20% the moment I drove it out of the dealer’s lot… Did I pull over, call the dealer back and tell him I no longer wanted the car, as it has gone down in value? No, it held “future value” for me. People forget this as they wax poetic over their hardship letter to the lender. They’ll never get into another house. They have no money, never did. Now and in the future, one will actually need money to buy a house, which is not a new concept. The meltdown will last (be remembered)a generation.
July 15, 2008 — 10:54 am
Bob says:
“If one does not get on the carousel now, they will probably miss out down the road.”
Like I said…
July 15, 2008 — 11:30 am
Tom Vanderwell says:
Good points, Bob and Gary.
I think what we, as the professionals, need to do is have a good solid grasp on what is happening, what the numbers mean and be able to help them interpret it for their situation.
I know I’ve learned a lot hanging out at sites like http://www.bawldguy.com, here, http://www.calculatedrisk.blogspot.com, http://www.blownmortgage.com, and http://www.housingwire.com. We need to raise the education level of people out there so they can decide for themselves what to do.
Does that make sense?
Tom
July 15, 2008 — 4:30 pm
KO says:
Gary,
“Well, we know the market probably will go up, with inflation being an inherent part of a capitalist economy.”
Inflation is not inherent in a capitalist economy, quite the contrary in a free market economy prices should generally fall. A perfect example is computers. While prices and cost of living have increased the price of a new computer has fallen. Inflation really is not needed under capitalism or the free market. Real Estate would still be a good investment, the value of the land would increase not the value of the structure. Buildings are like your car they depreciate which is the opposite of the land.
July 15, 2008 — 7:22 pm
Gary Frimann says:
Please go back and study some Economics. A 1965 Mustang costs more today than it did in 1965. Why, because there are so few. Why is the minimum wage higher now than it was 30 years ago? Why are movie tickets more expensive. Things do go down in price, i.e. DVDs compared to 10 years ago, computers, TVs–all things that technology has brought the price down on.
I live in Silicon Valley. The Scarcity of land has driven up real estate prices. Houses that sold for $22,000 in 1965 now sell for over $1,000,000. Supply and Demand. No depreciation. When we moved here when I was a kid, no one anticipated the rise of H-P, the beginnings of Apple, Cisco, Yahoo, Google, Sun, Norton, McAfee, Adobe, etc. Some folks just got lucky, and earned more on their homes than they did working their jobs.
You are referring to depreciation of a building known as “cost recovery” which is a paper loss. Trust me, an office building built in the 60’s is selling for a lot more than it did in the 60’s, and not just because of the increase in value of the land. It is because the Utility is still there, which hsa a price. If houses were going to drop in price, who the heck would by one. Houses have risen, on average 6.2% West of the Mississippi and 5.4% East of the Mississippi since WW II (A figure I heard, sounds reasonable, but I have not verified). Trading has also increased across the Pacific more since then rather than the Atlantic, which took place for the first 200 years of our nation’s history. Labor costs go up, as well as the cost to build a home, not to mention the land costs. Don’t forget, we’ve moved the toilets inside, homes have gotten bigger in the last 40-50 years, there is a lot more stuff in them, i.e. dishwashers, garbage disposals, trash compactors, bigger closets, laundry rooms, 3 car garages (compared to a functionally obsolete 3/1 house with small closets and the laundry in the garage.
One cannot compare the price of computers dropping with housing prices. I deal all the time with this with younger engineers. They think because the indutry they work in has dropping prices, all prices should fall.
That is not the case. Not at all.
I don’t know why people think that way. Let them sit on the sidelines, and they’ll never get a house.
Inflation is indeed inherent in a Capitalistic economy, as the main goal of any business in to maximize profits, and that is done by increasing revenue, or cutting costs, or both.
July 15, 2008 — 8:29 pm
Gary Frimann says:
This is from Wikipedia, referring to buit in inflation:
http://en.wikipedia.org/wiki/Built-in_inflation
If prices of houses were to go down over the long term (or anticipation of the prices of houses to go down over the long term), why in the heck would anybody buy one??? We would all rent and let the landlord take the haircut. Just like we are allowing the lenders to do right now. History has shown us that the price of houses generally tend to go up. More so in some markets than others. Don’t just hink present day Detroit, Sacramento, Las Vegas, etc. A lot of speculators came into the market. Investors are those who bought a cash flow. Most did not buy a cash flow.
July 15, 2008 — 8:40 pm
Dan says:
So what do we do to be ethical agents in this market? Lets say we get a call from a young couple fresh out of college , getting married and ready for their first house. They are absorbed in their own lives, don’t watch the news that much, and are kind of out of it when it comes to the economy. They want to buy a house and they think it will be five or seven years before they move again.
They aren’t thinking about anything but their Camelot lives and know that maybe they can get a bit of a deal, but for them the deal may just be getting something that used to cost $375,000 for $350,000. They are excited and anxious to move. They want a really nice house. What does an ethical agent do with them? Warn them that the house value may go down for a couple of years and may or may not recover in their five year period? Tell them if they wait a year they may get a better deal? Explain that their jobs may disappear if the economy slips into recession? Burst their bubble so to speak? Part of me thinks yes and another part thinks no. I am not completely convinced that it is the selfish part of me that says no. If I had to guess I would guess that prices will drop. But I am not a financial analyst or consultant. I don’t think that I should necessarily advise people to make life decisions based on my guesses. Maybe prices will go down, but at the same time, maybe interest rates will go up. Maybe loans will become much harder to get, maybe this is an opportunity, who really knows?
July 15, 2008 — 9:03 pm
Gary Frimann says:
First, let them decide. I’m sure if they asked their parents, and their parents were homeowners, the parents would probably say, “Yes!” as it was the best decision the parent ever made. A young couple, say in their mid twenties, taking on a 30 year loan commitment is tough to grasp at their age. But, it worked for Pop, and it worked for Grandpa, so maybe that formula will work for them, and they wont miss an opportunity to be part of the ownership class. We as a a society need to get over a myth that a house will double every 6-10 years. People now are afraid they are “catching a falling knife”, BUT different people are in different phases of their lives. Some are secure in their jobs, perhaps in their 50’s.
I showed a house in my neighborhood that was an REO, just the other day. Across the street were 5 cement trucks as sowmone was dropping about $75-100K for a new patio and swimming pool. Huge home improvement.
“A Tale of Two Families” is what I call it.
The guy who let his house go might have lost his job, or perhaps his payment went up, and HE decided it was not worth it. I would have stocked shelves at a store on the graveyard shift, or delivered papers, or worked graveyard at Jack in the Box to save that house. But, under contract law, the breaching party (in this case, the borrower) has no duty to mitigate damages. He just walked away. He will, probably, be forever part of the renting class. He’s thinking rents are cheap. Yeah, now. A fixed 30 year loan has no increases…
It is a good opportunity. Rates are at historic lows, prices are at historic “affordable” lows, and what position will they be in if they do not buy…
One can always refinance a bad loan down the road. You can never renogotiate a bad purchase price.
July 15, 2008 — 9:59 pm
DJ Swanepoel says:
These are all great thoughts, but people need a way to focus and understand the information in a concentrated place. For example, much of the time if people want info, what is the top-rated site they go to? Wikipedia. So I think collaboration in the real estate profession is key, as well as openness.
We need to be willing to contribute and help people find their way, because this in turn helps those of us in any way involved in real estate. Considering these concerns, http://www.realestatewiki.com is a really good place to address them and help consumers and other real estate professionals get factual, up-to-date info. Obviously, I’m a volunteer there, so you could say I’m biased, but this article really rang true with me.
Information needs to be shared and built in a collaborative way that is advantageous to everyone involved.
July 16, 2008 — 1:16 am
Tom Vanderwell says:
“So what do we do to be ethical agents in this market?”
Dan – that’s exactly what I was hoping to discuss. Thanks for saying it so clearly!
“But I am not a financial analyst or consultant. I don’t think that I should necessarily advise people to make life decisions based on my guesses.”
So is that the role of their mortgage lender instead? I’ve had some interesting conversations with a local builder who I work with about the difference in their role (build them the house they want) and my role (get them the financing but also get them the right loan).
“One can always refinance a bad loan down the road. You can never renogotiate a bad purchase price.”
Gary – while it is true that you can’t renegotiate a bad purchase price, it’s not true that you can always refinance a bad loan. I’ve had a huge number of potential refis that I haven’t been able to get done because either the borrower’s credit deteriorated (as underwriting guidelines tightened) or they borrowed $150,000 on a house that they paid $160,000 for and now it’s appraising at $140,000.
“So I think collaboration in the real estate profession is key, as well as openness.”
DJ – very good point. How do we achieve that? I think blogs like this are great for it, but we need to be able to take it back “to the street” (and I’m talking Main St. not Wall St.).
Tom
July 16, 2008 — 7:35 am
Bob says:
Price vs interest rates is a fallacious argument. If you are upside down and need to sell, the interest rate doesn’t matter.
I can only speak to my market, so i ask potential buyers how long they expect to own the property. I then give them this basic math scenario:
if the market ONLY drops another 5% a year over the next two years, then levels off in year 3, if you sell at the end of the 3rd year and incur only 5% in fees, you are
down 15%. You would need two years of 7.5% appreciation each year to break even.
If we see anything more than a 10% drop over the next two years, then your break even point is longer.
You don’t need to be an economist or claim to have a crystal ball to give people information that will help them make an intelligent decision about buying a house. they can plug in their own numbers.
July 16, 2008 — 7:51 am
Sean Purcell says:
Tom,
Great post. Opened up some interesting comments. My .02 worth:
I don’t believe there has ever been a time when – over at least a ten year period – real estate wasn’t a phenomenal investment. Generally speaking, real estate doubles every ten years and has for some time. Using the rule of 72 we see that the 6.2% average return quoted by Gary doubles your home value every 11.16 years. I believe the actual average rate of return is higher, but I have no proof handy. So lets say 11-12 years to double your money. That’s a pretty good investment even if you don’t take into account the tax benefits. And we won’t mention the utilitarian value of owning a home. Nor will we bring into this the non-monetary gains derived by being part of a community. Owning a home… over a reasonable time period… is an inescable recommendation for long term wealth.
Bob, in his second comment, gives a very nice script to follow IMHO. Put the information in front of your clients and show them how to work a calculator. In the end it all comes down to how long they will be in the home and that is something only they can comfortably decide.
One last thought, home prices moving up and down is of secondary concern right now if you ask me. Assuming a decent hold period, purchasing is always the right answer. But even small increases in rates will wipe out someone’s ability to buy long before rising prices will. There are a lot of agents and lenders out there that have not seen interest rates above 7%. This is NOT normal. The clients that are having difficulty now will not even make it to the dock, nevermind miss the boat, when rates are 8%, 11%, 14%! Bottom line: take a good long look at expected time in the home and err on the side of purchasing. History is on your side.
July 16, 2008 — 1:59 pm
KO says:
Gary,
Please go back and study some Economics. A 1965 Mustang costs more today than it did in 1965. Why, because there are so few. Why is the minimum wage higher now than it was 30 years ago? Why are movie tickets more expensive. Things do go down in price, i.e. DVDs compared to 10 years ago, computers, TVs–all things that technology has brought the price down on.
I live in Silicon Valley. The Scarcity of land has driven up real estate prices. Houses that sold for $22,000 in 1965 now sell for over $1,000,000.
Your are exactly right why a 1965 Mustang has such a value it can not be recreated. Also, it is the scarcity of land that causes real estate to be a good investment. I can not be in more agreement. Inflation is why wages have increased and movie tickets are more expensive.
Inflation is indeed inherent in a Capitalistic economy, as the main goal of any business in to maximize profits, and that is done by increasing revenue, or cutting costs, or both.
Similarly, the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.
http://mises.org/story/908
Inflation is not at all inherent in capitalism. A business maximizing profits doesn’t cause inflation, actually it has nothing to do with it. You said exactly what businesses do, increase productivity or cut costs. Since all economics is zero sum, all becoming a better capitalist does is increase your share of the total pie. You are unable to cause inflation.
July 16, 2008 — 4:20 pm
DJ Swanepoel says:
@ Tom
I think we achieve this by being as honest as possible with each other and with potential clients. By “keeping it real,” so to speak.
This means breaking information down into simple terms that can be understood by those outside of the real estate industry or those interested in it. Getting rid of the fluff and talking to clients as human beings.
Sure, obviously we’re in it for profit, but the best Realtors also care about helping the client find what they really want or need. That goes for any industry.
Its about calling out the scammers and showing people the difference between an honest Realtor and one who’s up to no good. Its about creating information that’s easily accessible and understandable for people who are in real estate and people who aspire to be, or even just the freelance writer looking for good information.
Its about getting out of the “clique” mentality that happens in every professional field and reaching out to everyone, getting rid of the verbiage that is “exclusive.”
Its about helping every random Joe who has a question without making them feel stupid.
And the list goes on…thanks for the great comment Tom, and keep it real;p
July 17, 2008 — 5:19 pm