By Kenneth R. Harney
Saturday, November 26, 2005
Pretty much everybody in real estate knows what's up: The hot air is hissing out of what David Lereah, chief economist for the National Association of Realtors, once enthusiastically called the "Great Real Estate Boom of the 21st Century." Now even Lereah agrees the boom is well past its peak. It's now "winding down into an expansion," he says.
The real estate boom is dead! Long live the real estate "expansion!"
Instead of double-digit appreciation rates, look for 4 or 5 percent appreciation in 2006. Instead of mortgage rates at historic lows, look for conventional 30-year rates in the 7 to 8 percent range and a couple of points higher for subprime borrowers. Plan for slower-moving sales, more unsold housing inventory sitting on the market and scaled-back listing prices.
This is the "soft landing" scenario that many, but hardly all, economists expect to be the final phase of the current cycle. Others forecast harder landings if interest rates get out of hand in the frothiest cities of the West and East coasts.
Who knows for sure where your local real estate market will be next Thanksgiving? Nobody. But this much seems certain: Sellers and buyers in the coming months will need to change their assumptions and strategies from what they've been for the past three heady years.
How? Here are a few thoughts, based on observations of what happened -- and what worked -- in earlier cyclical downturns during the 1970s, 1980s and 1990s.
Prospective sellers and buyers in 2006 will need to be much closer students of the dynamics and psychology of their local markets than they had to be during 2003 and 2004, when sellers held most of the cards and buyers begged them to take their money. If you are seriously thinking about selling your primary home or an investment property next year, first you've got to comprehend precisely where your real estate is positioned inside its own sub-segment of the overall market.
Even in a broad down cycle, there may be counter-currents affecting property such as yours. For example, if you've got a relatively modest house to sell, it might have a deeper pool of potential buyers than you would imagine in a market that is trending downward overall. That's because qualified prospects who would otherwise prefer to buy a bigger, better-located house than yours may find themselves locked out of contention for costlier properties made less affordable by higher mortgage rates.
On the other hand, you may find that the moderately priced investment condo you bought -- and planned to flip for a profit in 2006 -- is part of a glut of similar properties now sitting on the market competing with one another. There may not be enough buyers to cut the glut for years. So if you absolutely have to sell, prepare to take a bath. If you don't have to sell, keep it off the market. And keep looking for tenants who will reduce your red ink during the down cycle.
What about the buyer's perspective? Down cycles can produce your best opportunities in a decade. But bear in mind that many sellers you encounter will be in denial about pricing. They will refuse to believe that they cannot get what their neighbors got for their less-attractive house across the street in the spring of 2005.
Walk away from everything but the most soberly priced deals. After all, you can't know for sure when the cycle will hit bottom.
Some techniques and tools for down cycles that can work for both sides of the table:
Seller takebacks. If rising financing costs get in the way of a sale, consider taking back a note secured by the house. If the buyer lacks the 10 to 15 percent of the price you're asking to qualify for a conventional mortgage, consider taking back a second mortgage or deed of trust that will fill the gap. Alternatively, you could take back a first mortgage at a concessionary rate. An entire industry exists in the financial markets that will purchase your properly drafted takeback note for cash. A competent local real estate attorney can help.
Closing costs and other concessions. Some sellers can set their house apart from the pack by offering to pay portions of what would normally be their buyer's settlement fees. Home builders in tough markets may pay all closing costs, plus throw in some upgrades, to move the property.
The bottom line: Intelligent sellers and buyers in softening markets are, first and foremost, resourceful. They bring to the table whatever is necessary to get the deal done. They are well informed. They talk to the top-producing realty agents, lenders and appraisers regularly to get insights on pricing, strategy and timing.
They are all-weather players, prepared to profit in every phase of the cycle.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.