Op-Ed(ucation)

A client sent us a link to a Times article yesterday. This is a client who's hoping to sell their house and this article paints none-too-pretty a picture. Give it a gander. Then come back to your favorite real estate blog and read below for my response to our client. (Reproduced with their permission, of course.)

"Interesting article. The two things I think the writer gets right are:
1. The illiquid real estate market is stagnating
2. The “shadow inventory” being a real issue

"In a more liquid market, prices drop rapidly until the market “reaches” the buyers. In real estate, prices tend to fall more slowly. The thing people forgot in the past decade is that real estate is fundamentally a long term, illiquid investment. You can’t just wake up one morning and decide to sell your property, as if it were stock in IBM. Admittedly, it seemed that way for a long time, but that’s not a normal reality for real estate. The liquidity of the market was, in part, a function of the liquidity of the mortgage market. Now that the mortgage market is tighter, so is the real estate market. Seems obvious, but we all sort of lost sight of this.

"I actually addressed the “shadow” market in a recent mailing. This is my biggest concern about the future, though it may come to nothing. There’s hard data (something not heavily embraced by the writer of the article) that says that the banks are holding back foreclosure inventory to prevent a flood on the market that would drive values down. In one sense, this is very troubling. Part of me wants to just let the bank-owned (REO) inventory sell off so we can see where we really stand, even if it means driving prices down; like letting a wildfire burn off all of the underbrush to allow for new growth. It might be painful, but at least it would be over. In another sense, it’s very reassuring. As long as the banks maintain this approach, property values should be somewhat protected. We might be able to pull the Band Aid off slowly enough that we hardly notice how much it hurts. (Excuse the mixed metaphor.) By all accounts, the banks learned their lesson in early 2009 when they released too much REO inventory at once and cannibalized their own market. Regardless, the shadow inventory makes people nervous, and for legitimate reasons.

"There is a doom and gloom school of thought that says that we have years to go before we hit bottom. This is clearly the point of view of the writer. Fair enough. Indeed, the notion that a 3 bedroom, 2 bath house ought to sell for $800,000, regardless of where it’s located, is, on its face, a little ridiculous. You could build a house for half that price. But this premise is built on a willingness to throw out decades of economic history. From 1970 to 2006, the median price of a home in Marin County went up every year, except for 1990 and 1991. Suddenly the price of a Marin County home is supposed to drop by 300%? I suppose anything is possible, but this seems unlikely unless a full scale reassessment of our economy is in process. And if you believe that prices will fall significantly further over the coming years, then that argues for selling now, while you can still get somewhat close to the top of the market.

"I am far from a glass-half-full person by nature. In fact, I tend to be a worst-case-scenario person. I willingly admit that things could get worse before they get better. But I think it’s worth noting that the writer’s source for the opinion that the price of an $800,000 home in the Bay Area is “unrealistically high” is a “blogger”; not an economist. (I have a blog, too, but I don’t expect to be quoted in the Times.) I’m cautiously optimistic about the market. In fact, I plan to invest myself in the next 12 months. These kinds of articles always smack of the blame game to me. It is popular to blast Realtors or NAR as being a false engine driving an unrealistic real estate market. It’s a fair critique, but one that’s based primarily in opinion, not fact. It’s a kneejerk reaction, like blaming SUV drivers for the war in Iraq; there may be a residue of truth to it, but certainly the real story is more complex. (Should we blame Best Buy when someone replaces a perfectly good, eight year-old television with a new 50” HD flat screen that they can barely afford?) There is very little actual data in the article. I don’t necessarily disagree with its premise, but I’m not sure I like its methodology.

"For whatever it’s worth ( I’d have to check to be sure), I think I’ve worked on more transactions in the past 12 months than in any previous 12 month period over the past five years. The point? Houses are still selling. Buyers are still buying. Lenders are still lending. I guess I question somewhat the motivation of the writer of the article. I agree that there’s plenty of bad news out there. We can all throw our hands up and decide that the sky is falling. Or we can put our nose back to the ground, get to work, and see if we can solve this."