I was in Ashburn Village over the weekend showing some homes when my clients asked what a home would have sold for just a couple of years ago? In my opinion it would have been close to $775,000 two or three years ago, but the home sellers were asking $575,000 on that cold Sunday in October.
Now that’s huge. But it is an honest result of a feeble economy. It’s times like these when we are all panicky that Mr. Potter would be buying, picking up some bargains…
I chose the word “feeble” because it is pretty accurate right now, and also because it was bantered around on CNBC’s “Fast Money” which I listened to over XM radio on the way home. They can get addicted to a word on those shows for at least for 30 to 90 seconds.
It is essential to understand that residential real estate is a true barometer when trying to observe economic activity. The formula is easy, especially when you are on the ground floor like I am.
Here are some key elements that impact real estate economics:
- Job security
- Mortgage interest rates
- Mortgage Backed Securities
- Personal wealth
- Price of gasoline
- Price of real estate
Job Security: In the past few months I have had a handful of clients pull back the reins on real estate decisions because of job insecurity. The fear of layoffs is a huge influencer when deciding to buy or sell a home, or to commit to a new mortgage.
Mortgage Interest Rates: Since January 2009, the mortgage rates are down over 20% going from the low 6.25% range to 5%. If they pop up to 6% then consumer buying power drops like a rock. Resets in conforming loan amounts are also in the mix. Again, another important influencer.
Mortgage Backed Securities: I sat in on a presentation with Dr. Michael Fratantoni of the Mortgage Bankers Association on September 23rd at George Mason University. Take a look at the slide show and you will see the chart that shows how the Fed and the Treasury were the majority MBS buyers most of 2009, and the program is planned to cease in March 2010. There will be a huge void in this market.
Personal Wealth: The severe drop in the world stock markets was a sobering wake-up call to everyone with a retirement portfolio, stock investments or stock options. And if you were looking at selling your home then your equity stake may have been cut dramatically. I have a number of clients who have stock options that are virtually worthless.
Price of gasoline: Yes, it is about $2.59 at the pump but the price per barrel has been creeping up recently and that will trickle down to all drivers. I firmly believe that $4.00 gas pushed many people over the financial edge in 2008, and was one last nail in the coffin for many.
Price of real estate: We currently have an excellent buyer’s market. Prices have dropped significantly, mortgage interest rates are around 5% for 30 year, fixed rate mortgages, and in the case of that home in Ashburn Village… well, those sellers were offering a bargain to a buyer (in my book, this home was a 10). And still, at that great new price it has sat on the market for 75 days. To me, this lack of buyers really defines a feeble economy.
Now, if you are secure in your job and were savvy enough to buy into the stock market in March when things looked really grim (Dow 6,500 and sinking) so you have a nest egg, then this is an amazing time to buy the home of your dreams. These homes are “on sale”. Hello Mr. Potter!
Take a look at some of the recent stats on market activity… yes, buyers are in the driver’s seat. But buyers like this are far and few between which perpetuates the feebleness of the economy.
George Bailey said it in “It’s a Wonderful Life”,
Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicky and he’s not. That’s why. He’s pickin’ up some bargains. Now, we can get through this thing all right. We’ve, we’ve got to stick together, though.
