Real Estate is Local
By Harriet Cochran Murrray • Cochran Real Estate - August 2008
If you continue reading the media, you can believe the US is experiencing the worst market in the past 25 years. The media would also have you believe real estate is international and bad markets follow each other. They would also have us believe that there was nothing that could have been done to prevent the soft market.
Little news is reported on the greed factor creating financial markets for weak mortgages, which were sold as “securities”. We do not read or hear in news reports about the unethical practices of over appraising apartments and condominium in order to refinance and include miscellaneous costs in the new loan such as points, mortgage fees, and other buyer closing costs.
 We do not hear about the mass psychology used on thousands of buyers who were lead to believe that the market would continue to be strong, when we were ignoring the natural forces of supply and demand. Many “service” people in these over hyped mortgage and financial markets made money at the expense of others.
Some people saw what was happening. John Paulson made $2.7 billion dollars shorting sub prime mortgages. Others, less well- known, made fortunes and benefited financially from seeing and acting on forces, which others either did not see or ignored.
Realtors know a market is local. There are no gross generalizations for a national market as large as the US. For most owners, a house or condominium is a home first and an investment second. In truth, a typical owner-occupied home increases between 50-100% in ten years. What other investment can boast these kinds of returns?
The natural cycle of real estate is similar to a commodities market, “like pork bellies” a wise man from Oklahoma taught me years ago. Cycles have highs and lows and are a result of imbalance in supply and demand. A seller’s market becomes a buyer’s market over time.
Local markets need to be evaluated on their own and not generalized as “the” market. Many markets have or will become a buyer’s market as a response to our over supply of properties.
 If the local market is a buyer’s market:
- If sellers are to sell, they must have a property in demand in their local market. In order to have a chance of selling, the product has to be well located and well priced. Sellers have competition and if they do not accept this reality, they will have to learn to wait.
- Prices will come down when there fewer buyers in a high inventory market.
- Bottom feeders appear to “steal” properties as they look for the vulnerable distressed cases. Distressed can mean distressed sellers or distressed properties, which have flaws of location, condition, floor plans. Bottom feeders can make mistakes in buying the wrong property, which ends up not appreciation when times change, and it becomes a seller’s market again.
- A buyer’s market normally means that buyers are in short supply compared to inventory of properties, as well as the numbers of real estate agents. Agents must work hard to get and keep the loyalty of buyers, who may jump from agent to agent, thinking they can get a better price or find a property only one agent knows about. Agents may also be expected to cut their commissions along with the seller’s lesser price. Prices and fees go down, as prices and values level out and balance. Everyone in the market is affected by the local economics.
- Sellers have to become more realistic as buyers enjoy their opportunity, because when circumstances change and it becomes a seller’s market, the roles will be reversed!
- The timing issue of when a market turns from seller to buyer can be hard to see if the signals are not apparent or ignored. In a market like we have in Mexico, there is little data to show actual sale prices, time on the market, seller concessions, mortgage or cash transactions.
- Generally, the circumstances in one city or country are not causes for conditions in another the local market.
- Exception: if a market is strong with second home purchasers who have leveraged other assets to pay cash or put mortgages on their second homes, they may be more motivated to sell if their home or primary market is down and requires cash infusions.
- Motivated sellers are not a bad situation to have. In fact, without motivated sellers or motivated buyers, properties do not sell as they would normally. Sales prices should be a reflection of the equilibrium between what a buyer wants to pay and a seller wants to receive.
Snapshot of some local markets:
- Ft.Lauderdale, Florida June, 2008: Compared to the previous year, volume of houses sold and prices was almost 10% lower than the previous year. If we believe 10% appreciation is good, then 10% depreciation is not unhealthy. To achieve balance, supply and demand have to achieve equilibrium.
- Puerto Vallarta, Mexico, 2008. Middle priced properties for this market have less activity than those under $350k and close to $2,000,000USD. Rentals are still popular, but they are more competitive as more inventory comes on stream. Stronger marketing and discounts are needed to build or maintain occupancy rates.
- The Hamptons, New York 2008: As mega fortunes are affected by economic changes, historic estates change hands in this historic and affluent east coast community. Prices can range over $100 million, with homes from $1,000,000USD to $10 million flat.
The disparity between the wealthy and the less affluent becomes wider as as the middle class is squeezed out.
- Arizona, Florida and New Mexico 2008: Deal with a number of foreclosures as sub prime and investor mortgages cave in to high interest rates and fewer buyers. These states enjoyed popularity the past few years as many mortgages were funded to bad credit risks or highly leverage speculators. Equilibrium comes back if there are enough buyers to find lowered prices in the current inventory. Reports are that Europeans are coming into the Florida market hunting good deals, as the ocean and beach are highly desired world-wide. Sellers in Arizona organize efforts to attract Euros, as well.
Markets are local. If your market is down, find knowledgeable real estate agents to help you with a plan to buy, rent, or sell wisely.
Economic forces of supply and demand seek balance or equilibrium when markets are off in one direction or the other. Wise investors see what is happening and benefit. Email to a friend
Harriet Cochran Murray
E-mail: harriet@casasandvillas.com
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