The MGH Report

Michael G. Haran, Proprietor

WHY BUY NOW?

Posted by on Feb 13, 2009

A lot of people are sitting on the sidelines waiting for residential real estate prices to dip even lower than they currently are. Is this a smart move or are they missing a golden opportunity? Everyone knows that wealth is created in times like this but is this the time?

The current economic situation has created a buying opportunity that hasn’t been seen in the past 20 years. Entry level home buying activity is dominated by first time buyers and investors but trade up and upper level housing sales have ground to a halt. So what’s the problem why aren’t housing sales going through the roof?

The reason is we are in a deflationary mind set. People still think housing prices are still falling. This is why people are not buying and banks are not lending. Why buy a house if it could be worth less tomorrow and why would a bank lend on a depreciating asset? And why do they think this? Because it’s true. Housing prices are still falling. But should that be a reason not to buy? I don’t thinks so.

The cause of the entry level price depression is over supply. This, in itself is not unusual. Normally, residential housing runs in a five year cycle. Prices go along; the population continues to grow; not enough houses; prices increase with demand; builders over build to that demand. Sales slow; prices stabilize to reflect that demand; prices go along; and the cycle repeats itself.

What happened to the last cycle was that cheap money caused an over supply of houses to be built. Based on the California Department of Finance population growth projections, the current over supply of housing stock should be absorbed by the end of 2010. However, because the current supply of housing is artificially large it has affected the core U.S. economy.  And because 75% of the U.S. economy is based on retail sales, the collapse of the housing market has affected the value of the U.S. stock market.

As J.P. Morgan said during the collapse of the stock market in 1929, “buy when there’s blood in the streets.” Now no one knows when this real estate market will bottom out but bottom out it will. The current over supply of the hosing stock will be absorbed and the financial systems will be re-regulated. People will make money in this market. The only question is will you be one of them?

Even in high priced markets like the Bay Area opportunities abound. The value in buying an entry level home for $300k less than it was priced a year ago is obvious and dominates the headlines. But what about the trade up and upper end markets? The lack of a trade up buyers has affected the upper end market. There is a common attitude that the upper end homes are recession proof. To a certain degree that is true. If an owner of an upper end home doesn’t have to sell, they will simply keep their home off the market until the market comes back into balance. But there are always people that have to sell even in the upper end.

The deals are there and all a serious buyer has to do is educate him/her self and start looking. In addition, the pay-back provision of the $8,000 first time home buyer tax credit has been repealed in the final stimulus bill. No one knows when this market will bottom out but close is good enough. Wealth is created in times like this.

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