Well Are They Or Aren't They?

I stumbled across this blog entry out of Irvine, CA and found it to be well thought out and made a lot of sense in terms of explaining why we’ve recently seen such astronomical real estate highs - and lows - across the country. Although it goes against what I learned in the Power Pricing Course and is titled “Houses Should Not Be a Commodity”, I think it has some pretty good information. It has some intriguing graphs and charts predicting how all this will play out and is a pretty long read so here’s an excerpt:

“…once houses become an investment, the prices of houses begin to behave like an investment, and volatility is introduced into the system. You do not want houses to trade with the volatility of a commodities market. It causes more harm than good.”

He goes on to say,

“In a commodities or securities market, you simply cannot have a rally, unsupported by valuation measures, without a crash back to fundamental value. It is very clear the rally in house prices was not caused by a rally in the fundamental valuation measures of rent or income. This was documented in How Inflated are House Prices? and The Anatomy of a Credit Bubble. Many people forgot the primary purpose of a house is to provide shelter — something which can be obtained without ownership by renting. Ownership ceased to be about providing shelter and instead became a way to access one of the world’s largest and most highly leveraged commodity markets: residential real estate.”

Even though Dallas/Ft. Worth doesn’t see huge gains or losses like California, etc. I think there’s a lot of truth and value in what he’s saying and it’s definitely an interesting perspective. And I don’t think this guy is saying houses should be treated as a product either. He kind of invokes Maslow’s hierarchy of needs by saying shelter has always been a basic human need and now we’re in a time where many people are treating it as a commodity and most are losing (just as they would if they tried to beat the stock market).

I’d love to hear your thoughts.

What I Learned in Class: Part II

Is real estate a product or a commodity? A product's price can be influenced by marketing and advertising and the seller sets the price. Think products that are advertised during the Super Bowl. A commodity's price is set by the buyer and no amount of marketing or advertising affects the price of a commodity. Think the price of gold, for example.

Realtors and our clients have been treating a home as a product instead of a commodity and unfortunately we are not doing ourselves any favors. Think about it. You bought a stock at $100/share and then 1 year later that stock is at $50/share. So you turn to me to sell it for you for $100/share. But since I have a fee you want me to add that fee on top of the price you want. So even though no one is buying this stock over $50/share you have asked me to sell it for you at $115/share. Does this make any sense? Not really. Even if I advertised your stock on TV during the Super Bowl no one will buy the stock over the market value. Why? Because it is a commodity and not a product.

This is exactly what is happening in our real estate market today. Sellers who bought at the height of the market and have only been in their homes for a year or two are putting their homes on the market at inflated asking prices to recoup their costs. The problem is that buyers are seeing right through this. There is no perception of value. And when there is no perception of value there will be no sales.

Many agents and sellers are saying "There just aren't any buyers out there looking!". This is a myth and here's why. If a home's market value is $500,000 and that home lists for $450,000 how long do you think it will stay on the market? Not long at all. This is because buyers know when a good deal presents itself. The bottom line is that there are just as many buyers out there today as there were in 2005. The only difference is that today's buyers don't see the value in many of the homes on the market because the sellers are asking inflated prices to recoup their costs. And where there is no perception of value there will be no sales.

To wrap up, seller greed is due to being uneducated about the current market conditions which leads to overpriced listings, which means few or little sales, which leads to increased inventory, and when inventory rises, consumers push prices downward. (Supply and demand)

So if someone is thinking of selling their home and they need to ask top dollar to get out of the home without paying money at closing, I would tell them to stay in the home until they can ask a fair price. Otherwise, they will not only be wasting their Realtor's time, they will be wasting their own time and effort showing the home for 6 months or longer.