Real Estate Reality
Attaching an initial value to real estate and then accurately following that value is a subject that has long intrigued me. Real estate is not like the stock market, where prices are determined daily by buyers and sellers and listed for all to see. Something very strange is going on in many North American housing markets right now, and it reminds me somewhat of people who refuse to admit that one of their favourite stock selections is not working. This dilemma is called ‘hanging on to yesterday’s prices’. Many current home sellers seem to have convinced themselves that if they just shut their eyes and believe strongly enough, a buyer will suddenly materialize and pay them what they could have gotten for their home a couple of years ago. After enough people keep believing this the home inventory just keeps stacking up. Of course there are always motivated sellers, as some people can’t wait for a better price because they’re relocating, or they can no longer afford their mortgage. But a lot of sellers, especially those who can afford to be picky, just can’t get out of their heads what they could have gotten for their home at the peak of a market. And so they keep waiting for the ‘right’ buyer to come along.
A business associate recently told me about his home in Orlando. Two years ago there were approximately 4,000 homes for sale there and today there are over 26,000 – a record. Yet housing prices there are down just 2%. How can that be when there is so much supply relative to demand?
In another community a developer is sitting on several million dollars in unsold spec homes. He’s not getting any offers but he refuses to lower his list prices a dime. One homeowner in this development ran into financial trouble and listed a home for $395,000 that is similar to ones that the developer is trying to sell for $440,000. However there were still no offers to be had. When he further lowered the price to $369,000 he still got no offers, and eventually the house went back to the bank. There are a number of factors working in both of these cases, but one of them is that sellers simply won’t accept what reasonable buyers (who are now in the driver’s seat) are willing to pay. The housing problem is much more acute in the USA than here so far but the message is the same. All trends change and what you could have gotten for your home at the peak of a housing bubble is just as irrelevant as what you could have sold Nortel for in March of 2000.
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