Tired of living in my broken-up-into-many-rooms apartment, I emailed a local realtor if he had any nice lofts to sell me. Here was his response:
This is probably not the optimal moment to buy
real estate. I mean it’s not the worst time to buy (that was in
2006), but do we know where the bottom is? My partners are telling me that the Q4 numbers for Boston are going to be bad. 2008 isn’t looking good either. I think that over the next 6 months the best
case scenario would be flat pricing, and the more likely scenario is
lower pricing.
I guess you know that things are getting bad when realtors won’t sell you real estate!
Realtors are paid a 3% commission on a transaction whether it appreciates or not. The advice your realtor gave you is in your interest and goes against his or her own. Congratulations, I think you may have found that rarest of things, an honest man (or woman).
I find your experience very surprising, but i’m not totally shocked. I confront this same dynamic every day here in Alpharetta when selling real estate…I’m a realtor here.
Buyers a skittish to jump into a market that they think might still be going down. I have a bunch of buyers who tell/ask me this regularly…they naturally want to buy at the bottom.
The fact is, though, that no one knows where “the bottom” is. What i tell my clients is that if you need to buy, it is a great time. There are deals galore in Alpharetta, particularly on higher end new construction. People are amazed at what you can get for the money.
But if you just want to speculate in the real estate market, I’m not a fortune teller and can’t tell you where the lowest bottom is. What you should do is evaluate each deal on its merits and how it fits into your business/financial plans and then either buy it or not.
If you just need a place to live and are tired of a bad appartement, then by all means, go by a condo or house. Money is cheap, prices are low, sellers are motivated…what more do you want? If i worked in Boston, I’d find you a good deal and help you buy it if you were really serious ;->
Kevin Warmath
Alpharetta, GA
Alpharetta and Roswell Real Estate
Hey, you’re going to join the ranks of the property owners, destined to become “boring” by complaining about property taxes. If I were you I would find another real estate agent. Timing the real estate market is like timing the stock market, it doesn’t work. You never know where the bottom is until after the fact and the prices have gone up. Just approach the purchase as you would any other, do your homework and don’t overpay. Asking prices mean nothing now, there are also many foreclosures happening, you may find a great deal. Finally, unless you personally know a superstar real estate agent, don’t commit to any agent. I made this mistake before when buying a lake house and missed out on three nice properties during a more robust sellers market. Play the field by talking to many, you’ll find that 1 out of 10 that is good that way and end up with a good property at a good price. Good luck.
No doubt things are bad; the question is how long they will remain bad. For a good discussion of what happens when an asset price bubble deflates, read “A Demon of Our Own Design,” in which fellow MIT nerd Richard Bookstaber likens the situation to particles in a plasma, where all sorts of complex and weird interactions occur. Unless a gun is held to your head, as a long term “investor” you are a fool for buying assets when prices are headed straight down. To understand this, you don’t need a Ph.D. in economics from MIT; even a real estate salesman knows it. Presumably that salesman thinks you are no fool and doesn’t want to waste his own time searching for something you are unlikely to buy.
New home prices are at a 36 year low. What are the chances that they are at a forty year low? The home you buy now you will likely own for the next twenty years, if you miss the bottom of the market by eighteen months it will not make a significant difference to you.
The important thing is that the location be closer to an airport (or heliport) than you are now. Or are you going to stay in Cambridge?
If the realtor is properly diversified — i.e. if he also shows rental units and collects fees on those, enabling him to weather the sales downturn, or if he was smart enough to save some money during this bubble — then this is a smart move. Why collect 3% today, at the expense of your reputation as an honest broker, when you can line up a customer like Philip who may well buy three or four more homes in his lifetime? Not to mention all the friends that Philip will refer to this guy? Not to mention Philip’s rental business, should he decide that now is a good time to rent (which it is?).
It’s refreshing to find someone in the real estate industry who actually thinks about the future.
Colin: How are home prices, which in this area are slightly in excess of the cost of an airworthy (but older) Boeing 737, at a 36-year low? I think housing costs as a proportion of family income are at an all-time high in a lot of cities, no? And certainly houses have appreciated faster than inflation for the last 20 years or so. The Case-Shiller index says that house prices in most cities are more than 2X what they cost in January 2000. What are houses cheap compared to?
Everyone else: I’m not a trying to invest in real estate; just move into a place that has a more open design (see http://philip.greenspun.com/materialism/house-design/ for my ideal).
Colin: I found http://www.realestatejournal.com/buysell/markettrends/20051223-simon.html (WSJ article from 2005 headlined “Housing Affordability
Hits 14-Year Low”). The small slide in prices since 2005 has not erased the major trend from 1991 forward, I don’t think.
http://www.pr-usa.net/index.php?option=com_content&task=view&id=48728&Itemid=9 says that only 24 percent of Californians earn enough to buy the average house in the state.
36 years ago, I would venture to say that more single-income households could afford to buy a house in our coastal cities and suburbs than double-income households today.
Paul S.: The real estate market is fundamentally different from the stock market in the vastly different liquidity levels. One could see the crap heading toward the fan for a while now with the mortgage crisis, and predict that it would inevitably result in a drop in housing prices given how out of whack they’d gotten with respect to incomes. However, while such a situation would result in near instantaneous repricing in the stock market, such that the average person would have been unable to capitalize, the housing market is different. Hard to sell quickly, and you need at least one place to live. This crash will take several years, at least, to play out, and while it may be impossible to time the bottom to within months, anybody who invested in real estate in the past several years based on some notion of “efficient market” theory in real estate was crazy. This iceberg was seen a long way off, and buying real estate when there are still billions of dollars of bad ARMs waiting to reset is taking a fool’s bet.
On the other hand, if the cost of real estate falls by inflationary pressures rather than by lower prices, given current interest rates now might be a great time to leave a bank holding most of that bag…
Wow, if I ever do Real Estate in Boston I want that realtor! The general rule is you don’t meet a seller’s realtor who doesn’t think it’s a great time to sell, nor a buyer’s realtor who doesn’t think it’s a great time to buy. Universally, they are there to make transactions happen, with less attention on whether it’s in the interests of the client than one might like.
This realtor tells the truth, which is refreshing.
Of course, there is a way that realtors tell the truth that is not so great. I’ve never met a selling realtor at an open house that would not betray the seller by telling me secrets that the seller probably doesn’t want me to know, because the realtor thinks they might increase the probability of a sale (at a lower price.).
Brad, I manage a group of real estate agents (Realtor is actually trademarked, btw) and the issue comes down to fiduciary duty. Agents at open houses have a fiduciary duty to the seller and unless the law demands a certain disclosure, they could even be sued for giving out such information. This is a difficult and tight rope to walk at times. “Material” facts must be disclosed, but that can be a judgement call. When it comes down to money vs. honesty sadly many people will put themselves first.
This has been a very bad year for most agents. Even deals they have worked hard and honestly for have fallen apart when the property didn’t appraise to the necessary value or the buyer couldn’t get a mortgage. Perhaps this agent had enough of this happening that he wanted to filter for buyers who were really determined?
Sales are occurring but there are fewer of them. Those deals that happen are well-negotiated and from what I have seen are likely to be near the bottom of the price drop. What I mean is that a property bought at a good price tends to not lose value further but be stable in value. So my feeling is that each property has a bottom value and if the seller sells for that, the buyer will get the place they want for a price which won’t lose. They may not get much appreciation over the next year or two but they won’t be losing value. If you are buying not for investment only but to have a place to live and build equity as you pay off the mortgage then you will likely do ok. The only way to know if you are getting a good price is to do a ton of research on sales and visit as many similar properties as is humanly possible. Then you have to negotiate very hard. Do this and you can come out ahead. If you want to involve an agent, you can always recruit them as a buyer’s agent where you can put them to work gathering a lot of info for you. This way they are *your* fiduciary.
Peter,
I’m not entirely sure I can buy any sentence that includes the phrase “work hard”, “honest” and “real estate agent.” Real estate agents have set up their compensation structure to be entirely against the interests of buying clients. We sold our house several years ago by owner, and beat everybody else in the neighborhood to the sale. (There were many of us on the same block in Golden, CO trying to get out.) Doing the transaction was surprisingly and embarassingly easy, and there is no way in heck agents earn the combined 6% they make. We would’ve sold even quicker had people with real estate agents not been pushed away from our house by unscrupulous agents who didn’t want to deal with a FSBO.
I hope people wake up and eliminate the dead weight of losing 6% on every home sale to agents skimming off the productive economy. Real estate agent commisions are just like a tax, except with even less benefit to society.
Philip: if you eventually decide to buy a place, I hope you’ll consider going without an agent and buying from a FSBO. You’ll automatically be up 6%, and figuring out the ropes will be trivial for a guy like you.
They should clone your realtor. I can’t believe he actually dissuaded you from buying. Good for him! We have a long, long way to go before we hit bottom. Real estate cycles go up and down. Most people seem to forget that.
Would it be more effective to build a new house
using a custom design, if one can afford it, time and money?
Or maybe remodeling existing house,
if location is good enough?
There seems to be ways to make houses nicer,
much more energy efficient, and less expensive,
all at the same time, by good engineering.
Here is a link to some interesting presentations
on energy effective engineering:
http://www.rmi.org/sitepages/pid231.php
Don’t buy now Phil. Wait.
Here’s just one voice of many that are saying the same thing:
http://www.rgemonitor.com/blog/roubini/234460
JB,
It is insulting and absurd to claim an entire profession is crooked.
You are certainly welcome to put your house out for sale and lots of people do this, but an increasing number are finding it isn’t as easy or straightforward as they thought. Last statistic I saw was over 80% eventually hired an agent after their house didn’t sell. Are you familiar with all the laws regarding real estate? Just because you are an owner does not excuse you from the laws. Do you know all the words you cannot use in ads? Are you prepared for discrimination “testers” to come to you and ask leading questions? Do you know what you must disclose by law about the condition of the house? If you are fully prepared to take these risks yourself, and you can take your time selling, then go for it.
But, oh, what price do you put it on the market for? Most For Sale By Owner houses around here get the pricing by getting several local real estate agents to give them free market analyses. Since virtually no agent will do that if you tell them you will be selling the place yourself, these homeowners are using false pretenses (anotherwords, lying) to get work for free. Speaking of honesty, just how honest is that?
You may have some odd chip on your shoulder about real estate agents but the fact is they do provide a valuable service, and the market proves this. You sound like you have little clue what really goes on behind the scenes. Every profession seems real easy until you have to do it right, by the book, and have it work out EVERY TIME. I have heard several real estate lawyers here say they will not take a client who isn’t using an agent, just too much risk (joint and several liability). Our agents deal with FSBOs all the time, by the way. However, lately there have been very few (generally more FSBOs in a seller’s market).
Why don’t you tell us what your line of work is?
JB,
As an agent of almost twenty years in the real estate industry, I can accurately recount scores of horror stories from folks who thought they could “eliminate the agent and save a bundle” yet ran into myriad problems that ended up costing them lots more than they planned on saving by not going the REALTOR route.
And by and large, our commission structure is very much the same as many other services, i.e. financial planners, stock brokers, insurance agents, etc.
Lastly, if you have only had one experience in going the FSBO route and being successful, in my lowly opine your remarks about agents being not neccessary are akin to a novice golfer picking up a club for the first time, hitting a hole-in-one and then remarking how easy the game of golf is and that he definitely thinks golf lessons are overrated.
If you are able to sell current home,
and you want to buy another similar priced,
it may be as good time as any,
since all you pay is price of transaction.
It may even be a good time,
since there is many choices.
But selling may be a big challenge…
Peter:
I didn’t mean to imply that all real estate agents are dishonest, but that the structure of their business inherently is. I’m sure there are plenty of honest agents, who might even agree with what I said about the profession as it is today. And I don’t think I’m off the mark for being skeptical of a profession that claims to want to help you buy something at the best possible price and then pays itself a percentage of the sale price. Most people would consider that an ethical conflict of interest, at best. I’m sure you’re familiar with the study that showed that real estate agents generally get far better prices for their own homes than for their clients.
(Mark: I don’t think it’s fair to compare RE agents with stock brokers. Stock brokers compete on price, and all have lowered their commisions as a result of competition and advances in technology. They also don’t take a percentage of a sale, which would leave them conflicted about getting you the best price. They get a certain amount per share or a flat fee. Portfolio managers get paid for results, not churn. I really can’t think of any other industry where the compensation is directly at odds with the client.)
Hardworking people who contribute productively to the world generally do have a chip on their shoulders for people that contribute little and yet who make extraordinary amounts of money. During the bubble, houses weren’t even on the market for more than a week or so. Getting paid $12,000 (based on typical Boston area prices) for what can’t possibly amount to more than a day or two of work is obscene when the task at hand could be handled by pretty much anyone with a high school diploma. The other element of resentment is that 6% of housing sales represents a huge drain on the economy. Some rough math: given an annual home sale volume of about 5 million homes, with an average price of (conservatively) $200k, that’s a roughly 60 billion dollar dead weight on the economy per year. That’s a lot of money, and unlike the amount spent on taxes, which at least give us roads and defense, I’d argue we get very little back for that commision.
And about that “service done right every time with integrity”: Much of the blame for the housing bubble can be laid at the feet of real estate agents who were more than happy to sell houses to people who couldn’t remotely afford them. Was that in the interest of their clients? And where were the wise agents advising buyers of the risk of buying homes with “PE” ratios exceeding 40 when historical norms have them around 10? The fact that agents have protected their turf so well that most people can’t make a fair go of selling their own house isn’t a valid argument for their existence, in my opinion.
I also don’t buy the idea that the laws are so complex that one cannot figure them out without help. The same could be said for selling your own car, or virtually any commerce that one does in public without an agent. Anyway, I looked up the legal definitions of the square footage and bedroom count when I listed. It wasn’t rocket science. Besides, I never said I had a problem with real estate lawyers, who charge for their time, and don’t expect to be paid more just because your house is expensive. Unlike real estate agents, lawyers have ethics rules that prevent them from taking compensation in a way that goes against the interests of their clients.
I’m an engineering grad student, since you asked.
” And I don’t think I’m off the mark for being skeptical of a profession that claims to want to help you buy something at the best possible price and then pays itself a percentage of the sale price. Most people would consider that an ethical conflict of interest, at best”
Agents are not really very motivated to get the highest price because that reduces the likelyhood that the transaction will be completed. That is, risking the entire transaction (and working harder) for a relatively minor increase in the price would likely be a waste of effort (compared to applying that effort to another transaction entirely).
Philp,
You might want to look at these blogs: Irvinehousingblog and CalulatedRisk.
The commenters are mostly very bearish on housing but the blog authors write well and present interesting information. Tanta at CR will tell you more than you ever want to know about the mortgage business. She does this using very colorful language.
Irvinehousingblog has a page on rent buy analysis based on when the cost of buying is near the cost of renting as a decision making signal.
Why don’t you buy my house in San Jose as an investment. I just kicked the crazy lady out and have to do some fixup. It has a big lot, a separate studio/shop and is on a quiet deadend street close to shopping and the airport is a quick 10 minute drive. If you buy I don’t know if you are catching a falling knife or a exploding handgrenade.
Good Luck
The tired line about not timing the bottom is weak. Realtors have been saying that since 2005. No, you can’t time the exact bottom, but you can at least make sure prices are in the right ballpark first, and they aren’t. Check out the futures for the S&P/Case-Shiller Index for Boston. They are pointing down, down, down, for the next several years.