Friday, November 27, 2020

No Black Friday Deals in Real Estate

The real estate market is pretty hot right now. I know I have been writing about this for some time. But I still run into buyers looking for a "deal." But the real estate market will not tolerate a "deal." For every listing under $450,000 in our local market, their are multiple buyers interested and willing to offer. This means a house valued at $475k but listed at $450k will get multiple offers and likely sell for well over asking.

Our local market set a record for October sales and year over year performance and trends are pushing values up at nearly 1% per month. Buyers hesitant to offer over asking today, will only find higher prices on the next house they find after being outbid now. This can be a hard pill to swallow but the house a buyer gets today will likely grow in value over the next several months.

The "fear" buyers have is the fear of a market correction. This is actually in some ways an irrational fear but yet also rational. It is rational to be leery of buying an investment at or near the "top" of the market. But too many buyers focus on the investment angle rather than the utilitarian use angle. 

Every single day thousands of people buy a brand new car. Some commit tens of thousands of dollars to the effort knowing full well the value of that car will be HALF in just a couple of years. Why do they make this HORRIBLE investment? It's simple: they don't view it as an investment. They get the reliability of the brand new car, a warranty from the factory, and most important, the practical utility of ownership. They get to drive that car where ever they need to go. There is VALUE in that premise that far exceeds the "loss" of resale value over a short amount of time. 

Buyers looking for a home to LIVE in should hold the investment potential as SECONDARY to the utility value. The home is a shelter that is required to live a happy and healthy life. Shelter is one of the primary needs to survive, along with food and water. Worrying about how much profit you might make on this is silly and highly irrational. You make no profit on food or water that you consume, the benefit is: you don't die. Shelter falls into this category. You make ZERO profit when you rent your shelter from a landlord. In fact you will not recover ANY of the rent money. Rent is a total loss from an investment perspective. If a renter pays $2000 a month for a house, they are "losing" $24,000 a year. That is likely more than the down payment on a house of similar value. The down payment is what represents the buyers actual "risk" in the purchase of a home.

Even if a buyer pays $400,000 for a house and the market crashes a year later, leaving the value of that house at $300,000 they still have the utility value of shelter and if they used a loan to purchase it, the bank is carrying most of the risk anyway. Therefore buyers need to decide if the house they intend to buy is property they are willing to live in for several years. Buyers looking for a short term living situation are advised to rent unless they intend to hold the house for an investment after they move out. It really is that simple and the people willing to bid up a house over asking are doing so not because they are foolish, but because they want the utility that property offers and they are willing to pay more to have it.

It can be further noted that the 'great crash' of 2009-2011 led to a high rate of rental increases as landlords capitalized on increased rental demand due to a lack of competition from otherwise would be home buyers. My house lost roughly one third of its value right after the crash and I was even upside down in my loan. But my monthly payment was still about the same as a two bedroom apartment. But I wasn't living in a two bedroom house, I had a 2500 SF 5 bedroom house. I didn't worry about the short term 'investment' loss, this is my home, my shelter and it continued to provide that essential value despite its temporary loss of market value. The only downside was that I really could not sell it until the market recovered, in that sense I was a bit "stuck." But I certainly could have rented it out for more than my payment if I had needed to move away for some reason.

Buyers that are worried about 'losing' money and not making strong enough offers today are, wait for it... 


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