Declining Market-Fact or Fiction?
Declining market-Fact or Fiction-Part 1
The dreaded “declining market” conversation...I try my best to avoid it at all costs, much like the basic social rule of never discussing religion and politics, especially on a first date!
Since we have yet to really get to know one another...in that way I mean...I hesitate to even bring up such a topic as it’s sure to incite violence in some restaurant booth as a hard working loan officer or Realtor does their best to explain why the recent appraisal of their client’s home has just come in some $20,000 lower than what they bought it for a mere 2 years ago.
Also, since I’m probably the Appraiser that appraised the aforementioned home, or may be the Appraiser who appraises your home in the future, I feel it necessary to take some steps to protect myself in advance of any potential hostile meetings I may have with future clients. When I arrive at your home I will be wearing a rainbow wig, thick clown glasses with a rubber banana nose, and I may, depending on the temperature outside, speak with a thick Swedish accent. I do this all in an attempt to protect my identity from angry homeowners so I can continue my tour of pizza joints and mexican restaurants singing Karaoke on my way to American Idol, season 8!
In all seriousness and with respect to the current economic situation, I cant imagine how their going to top season 7, even if I do make it!
Ok, ok...I know what you’re saying, “but Sven (thats my Swedish Appraiser alter-ego), the value of my largest investment is dwindling and you’re making jokes!”
My only response to that statement is simply that if you’re not laughing about the whole situation and able to view it in it’s larger context then you’re likely to find the nearest clock tower or post office and begin taking out your rage on a host of unsuspecting victims...victims of the same economic situation you and I are facing.
It’s definitely endemic and wide spread. There doesn’t seem to be a neighborhood or area of town that is not affected by this so called “declining market”, and while I’m merely a ‘reporter’, of sorts, on the market, quite often the Appraiser takes the flak for the reporting...kinda like killing the messenger for delivering the bad news.
To fully understand the current situation it helps to understand how we got here and how to move beyond it safely. Unfortunately, there is no magic bullet or solution thats going to help everyone. My only goal of this series is education to increase awareness. Awareness can help to lessen the pain and also possibly show some light at the end of the tunnel.
Although I may get some arguments from a few surly economists (which I’m definitely not...an economist, that is) on all the varied factors that have lead to our current economic situation I will do my best to stick to the general topic of Real Estate and how it’s been effected.
Most people understand, at some level, that ALL things are cyclical. Meaning that all things move up and down in cycles. Nothing is immune from this since it is a fundamental and Universal principle of nature. The seas ebb and flow in cycles on an hourly basis, the planets cycle around the sun, our physical condition moves between health and disease (dis-ease in the body) on a daily basis, etc. Nature dictates that anything not moving dies. All things must move in some direction.
In addition to the micro cycles I listed above (micro, meaning they occur hourly, daily, weekly, etc.), all things also have to exist within larger ‘macro-cycles’, meaning that, in addition to their smaller hourly or daily cycles, all things are moving within annual, decade, and century cycles as well. Even the greater Global Warming debate today is less about whether the earth is warming (most don’t disagree that it’s warming) than it is about whether it’s warming as a result of all man-made issues or simply part of a Universal cycle of warming and cooling (I’m not making any statements either way about the issue, simply using it as an example).
Even though the Real Estate and mortgage markets are man-made they are not immune to the natural cycles that must occur for balance and stability to exist.
So, part 1 of this declining market issue is simply about one of the factors that has lead us to this situation: cheap money and it’s effect on supply and demand.
Regardless of what complicated explanation that surly economist wants to give us, all economic market situations can be boiled down, at some level, to the most basic economic principle:supply and demand. Several years ago, when it seemed as if nothing could go wrong in our economy, money was flowing like beer at one of O’D’s golf outings, and almost anybody could get a mortgage, buy a house, borrow money, get a line of credit, etc., and do it at very little cost (interest rates were very low, as you probably remember).
In addition, since interest rates had been low for so long and most people think “monthly payments” instead of long-term cost, variable rate mortgages and ‘pay-option arms’ became very popular financing instruments. They also became the tools that allowed the average person to live an above average lifestyle since they could now “afford” (I put it in quotes to denote the fallacy of affording something when we really cant) more home than what they could’ve purchase just a few years prior.
Now, Average Joe, instead of living in a home he could’ve safely afforded 3 years prior without taxing his ability to make payments, is living large in a home that, by all rights, he shouldn’t be living in. I’m not referring in any way to whether Average Joe deserves a $450,000 home in the gated community since I am not judging Average Joe’s self worth but instead commenting on Average Joe’s ability to pay his mortgage should things go bad...which they did. Since there were (and still are) billions of dollars in mortgages that were sold at 4% and 5% that have risen, or will soon rise, to 8,9,10% or more, that means, quite simply, that Average Joe’s mortgage has doubled or worse.
But lets go back a bit to when Average Joe was feeling good and thinking about moving up in the world. It will give us a little more of the bigger picture I spoke about at the beginning.
Back when Average Joe’s dollars were buying more, lasting longer, and increasing in overall strength due to a relatively strong US Dollar and low interest rates, everybody was feeling just like Joe. That includes Realtors, homeowners, builders, suppliers, factory workers, factory owners, etc… When things are good for Average Joe, they’re good for everybody!
When things are good for everybody, they’re good for everybody...get it? Buyers have money, sellers have products that those buyers want (supply and demand), demand for those products goes up because buyers have the money, supply runs low because everybody is buying, what happens when demand is high and supply is low?…. Anyone? Anyone?….right! PRICES GO UP!
Home prices rose quite rapidly based simply on supply, demand, and buyer perceptions of the market. It’s quite safe to say that buyers of just a few years ago may have overpaid for their home and may have done so with cheap money that has, all of the sudden, become quite expensive.
Now, many of those borrowers (now homeowners) cant afford the home they purchased, whether due to an unfavorable job situation or unfavorable financing terms (rising interest rates) so they are highly motivated to sell. They begin by placing their product (their home) on the open market at, what they believe to be, reasonable market price, which is typically what they paid for it plus some appreciation depending on how long they’ve been in the home. After all, isn’t that the way it’s always worked?
Unfortunately, the answer is a resounding NO, thats not the way it has always worked. What has always worked is that simple economic principle of supply and demand.
Today, unlike just a few years prior when most people bought, there’s an abundance of supply (lots of homes on the market) and very little demand. Since supply and demand ultimately affect pricing, when there’s lots of product available and very little demand for that product, prices fall.
Please don’t misinterpret my tone as I am not trying to be condescending in any way. I’m simply reporting on the current Real Estate situation from an Appraisers perspective since it is my job to explain in appraisal reports whether a market has declined, is stable, or has appreciated. It’s also in my nature to try and understand why something happens because knowledge is power. Knowing how we got into a situation helps us avoid it in the future.
In the most basic sense, the overall Real Estate market in this area has declined. It has declined due primarily to the reasons we just discussed. There are a few other reasons which we will discuss in parts 2 and 3 of this series and I will also make a few predictions about where things are going and how long it will take to get there, so stay tuned and we’ll talk again soon….
Blaine
The dreaded “declining market” conversation...I try my best to avoid it at all costs, much like the basic social rule of never discussing religion and politics, especially on a first date!
Since we have yet to really get to know one another...in that way I mean...I hesitate to even bring up such a topic as it’s sure to incite violence in some restaurant booth as a hard working loan officer or Realtor does their best to explain why the recent appraisal of their client’s home has just come in some $20,000 lower than what they bought it for a mere 2 years ago.
Also, since I’m probably the Appraiser that appraised the aforementioned home, or may be the Appraiser who appraises your home in the future, I feel it necessary to take some steps to protect myself in advance of any potential hostile meetings I may have with future clients. When I arrive at your home I will be wearing a rainbow wig, thick clown glasses with a rubber banana nose, and I may, depending on the temperature outside, speak with a thick Swedish accent. I do this all in an attempt to protect my identity from angry homeowners so I can continue my tour of pizza joints and mexican restaurants singing Karaoke on my way to American Idol, season 8!
In all seriousness and with respect to the current economic situation, I cant imagine how their going to top season 7, even if I do make it!
Ok, ok...I know what you’re saying, “but Sven (thats my Swedish Appraiser alter-ego), the value of my largest investment is dwindling and you’re making jokes!”
My only response to that statement is simply that if you’re not laughing about the whole situation and able to view it in it’s larger context then you’re likely to find the nearest clock tower or post office and begin taking out your rage on a host of unsuspecting victims...victims of the same economic situation you and I are facing.
It’s definitely endemic and wide spread. There doesn’t seem to be a neighborhood or area of town that is not affected by this so called “declining market”, and while I’m merely a ‘reporter’, of sorts, on the market, quite often the Appraiser takes the flak for the reporting...kinda like killing the messenger for delivering the bad news.
To fully understand the current situation it helps to understand how we got here and how to move beyond it safely. Unfortunately, there is no magic bullet or solution thats going to help everyone. My only goal of this series is education to increase awareness. Awareness can help to lessen the pain and also possibly show some light at the end of the tunnel.
Although I may get some arguments from a few surly economists (which I’m definitely not...an economist, that is) on all the varied factors that have lead to our current economic situation I will do my best to stick to the general topic of Real Estate and how it’s been effected.
Most people understand, at some level, that ALL things are cyclical. Meaning that all things move up and down in cycles. Nothing is immune from this since it is a fundamental and Universal principle of nature. The seas ebb and flow in cycles on an hourly basis, the planets cycle around the sun, our physical condition moves between health and disease (dis-ease in the body) on a daily basis, etc. Nature dictates that anything not moving dies. All things must move in some direction.
In addition to the micro cycles I listed above (micro, meaning they occur hourly, daily, weekly, etc.), all things also have to exist within larger ‘macro-cycles’, meaning that, in addition to their smaller hourly or daily cycles, all things are moving within annual, decade, and century cycles as well. Even the greater Global Warming debate today is less about whether the earth is warming (most don’t disagree that it’s warming) than it is about whether it’s warming as a result of all man-made issues or simply part of a Universal cycle of warming and cooling (I’m not making any statements either way about the issue, simply using it as an example).
Even though the Real Estate and mortgage markets are man-made they are not immune to the natural cycles that must occur for balance and stability to exist.
So, part 1 of this declining market issue is simply about one of the factors that has lead us to this situation: cheap money and it’s effect on supply and demand.
Regardless of what complicated explanation that surly economist wants to give us, all economic market situations can be boiled down, at some level, to the most basic economic principle:supply and demand. Several years ago, when it seemed as if nothing could go wrong in our economy, money was flowing like beer at one of O’D’s golf outings, and almost anybody could get a mortgage, buy a house, borrow money, get a line of credit, etc., and do it at very little cost (interest rates were very low, as you probably remember).
In addition, since interest rates had been low for so long and most people think “monthly payments” instead of long-term cost, variable rate mortgages and ‘pay-option arms’ became very popular financing instruments. They also became the tools that allowed the average person to live an above average lifestyle since they could now “afford” (I put it in quotes to denote the fallacy of affording something when we really cant) more home than what they could’ve purchase just a few years prior.
Now, Average Joe, instead of living in a home he could’ve safely afforded 3 years prior without taxing his ability to make payments, is living large in a home that, by all rights, he shouldn’t be living in. I’m not referring in any way to whether Average Joe deserves a $450,000 home in the gated community since I am not judging Average Joe’s self worth but instead commenting on Average Joe’s ability to pay his mortgage should things go bad...which they did. Since there were (and still are) billions of dollars in mortgages that were sold at 4% and 5% that have risen, or will soon rise, to 8,9,10% or more, that means, quite simply, that Average Joe’s mortgage has doubled or worse.
But lets go back a bit to when Average Joe was feeling good and thinking about moving up in the world. It will give us a little more of the bigger picture I spoke about at the beginning.
Back when Average Joe’s dollars were buying more, lasting longer, and increasing in overall strength due to a relatively strong US Dollar and low interest rates, everybody was feeling just like Joe. That includes Realtors, homeowners, builders, suppliers, factory workers, factory owners, etc… When things are good for Average Joe, they’re good for everybody!
When things are good for everybody, they’re good for everybody...get it? Buyers have money, sellers have products that those buyers want (supply and demand), demand for those products goes up because buyers have the money, supply runs low because everybody is buying, what happens when demand is high and supply is low?…. Anyone? Anyone?….right! PRICES GO UP!
Home prices rose quite rapidly based simply on supply, demand, and buyer perceptions of the market. It’s quite safe to say that buyers of just a few years ago may have overpaid for their home and may have done so with cheap money that has, all of the sudden, become quite expensive.
Now, many of those borrowers (now homeowners) cant afford the home they purchased, whether due to an unfavorable job situation or unfavorable financing terms (rising interest rates) so they are highly motivated to sell. They begin by placing their product (their home) on the open market at, what they believe to be, reasonable market price, which is typically what they paid for it plus some appreciation depending on how long they’ve been in the home. After all, isn’t that the way it’s always worked?
Unfortunately, the answer is a resounding NO, thats not the way it has always worked. What has always worked is that simple economic principle of supply and demand.
Today, unlike just a few years prior when most people bought, there’s an abundance of supply (lots of homes on the market) and very little demand. Since supply and demand ultimately affect pricing, when there’s lots of product available and very little demand for that product, prices fall.
Please don’t misinterpret my tone as I am not trying to be condescending in any way. I’m simply reporting on the current Real Estate situation from an Appraisers perspective since it is my job to explain in appraisal reports whether a market has declined, is stable, or has appreciated. It’s also in my nature to try and understand why something happens because knowledge is power. Knowing how we got into a situation helps us avoid it in the future.
In the most basic sense, the overall Real Estate market in this area has declined. It has declined due primarily to the reasons we just discussed. There are a few other reasons which we will discuss in parts 2 and 3 of this series and I will also make a few predictions about where things are going and how long it will take to get there, so stay tuned and we’ll talk again soon….
Blaine
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