Stay Ahead of the Curve
Real estate has always been a cyclical market. In extreme cases, we can range from euphoria to dispair. It’s easy for many to get caught up in all this as fear is clearly contagious. Yet, it also works both ways for the terror of missing out is as compelling a reason to jump in as is the hysteria that makes us want to get out at exactly the wrong time. Looking at the past several years gives us good examples of both.
While all the well publicized price declines have arguably been the most prevalent market force of late, examining what’s taking place below the surface will afford you the opportunity to be ahead of the curve. For some basis about prices, take a look at this chart. The message here is that it’s not the same all over.
A look at any charted index reveals lots of smaller moves up and down while the longer term view reveals the real direction. Some markets are meant for traders and some are meant for investors. Unlike stocks, the sales cycle and mechanics of buying and selling real estate never lent credence to day trading houses. Yet as you can see, buying a home and holding it for more than just a couple of years has proved to be a good investment even in the areas that have seen the biggest declines. Since our primary homes are meant for shelter and only incidentally help build wealth, it is a little bit like getting paid to eat at your favorite restaurant.
So how do we educate our consumers when they are overcome with fear of falling prices, fear of job loss and having all of this exacerbated by the 24/7 news? We must simply step beyond the media and provide them with information that’s timely, but also replete with the proper perspective of using time frames matching home ownership. In other words, if you’re going to buy today and own for 10 years, does it really matter if the value might drop a bit further 3 months from now? There are two prices in any transaction that matter the most, the price you pay and the price at which you sell.
I’ll be the first to acknowledge that psychology can rule the markets. Yet ultimately, the fundamentals will prevail. Let’s look at the basics: Supply & Demand Flyer
We see here that supply grew significantly. Yet, despite all of the breathless reporting we’ve witnessed, this has peaked at or below the levels of past cycles. The biggest factor here is overbuilding. Having been a builder, I speak from experience when I say it takes a long time to go from concept to completion. The NIMBY crowd, zoning & planning boards, environmental challenges, permitting, financing, labor, construction and finally sales hurdles all add time to the process. It takes years from the For Sale sign being planted on the vacant land to the first moving truck pulling up. In the midst of all that, the market will turn and turn it did. Worse, this time around the usual cycle was more than twice as long as usual and like trying to stop an oil tanker, if you start the process too late, you don’t want to be the one standing on the dock, wearing the captain’s hat or owning stock in the insurance company.
Moving forward, we have seen builders pull out the stops to sell their properties. Free flat panels, BMW’s, 3.9% financing, they are a creative bunch. Most have hit that dock now and that’s clear by the wreckage. Housing starts fell in January to an annualized pace of 466 thousand. We’ve not seen a number that small in over 45 years. At the peak of the past boom, the pace was more than 475% higher at appoximately 2.27MM.
Further, if you look at the “Housing Starts as a Percetage of Population” graph, you can see not only the usual cyclicality of this but moreover, the steadily dwindling progression when measured in this manner.
The simple comparison of homes built over time to the number of homes sold evidences the simplest basic foundation of markets and of course, the title for the piece- supply and demand.
The population rises at over 3 million per year and that increase fuels 1 million new households. If builders are now only adding less than half of the homes needed, where will the rest come from? Sure, they’ll be happy to build more as soon as the actual market demand returns but as we reviewed earlier, that process takes time. This is especially true when some of those tanker captains lost their stripes (and their shirts).
There are problems right now, but they will pass. Not unlike fish, people are comfortable “swimming in schools” and by nature, will never discover anything ahead of the crowd. Conventional wisdom is neither. Being the “one” unafraid to go it alone, step out of the pack and get where you want to be before the rest arrive will always allow you to prosper in the end.
Affordability has never been better than now. For those that marry that fact with the right instinct to take advantage of it and the longer term point of view that ultimately, fundamentals will trump sentiment, the recovery ahead will be all that much sweeter.
So whether you take advantage yourself to dig up some gold nuggets or set up shop to sell the shovels, now is a great time to anticipate what’s next and equip yourself accordingly to share the view with your clients, prospects and referral sources.