Friday, December 15, 2006

Without a "bubble," buyers are going to wait anyway

There has been much talk about how the press is slowing real estate sales. I’m going to present an argument as to why if buyers do not anticipate incredible equity gains they will wait with no regard to what the press is saying. In other words, common sense, without any knowledge of a bubble, is enough to force down home sales rates.

The first bit point is obvious. Home prices are at incredible heights compared to incomes. Thus buyers are going to be financially tight for a long time if they purchase. Buyers know this and this thought scaring them away from buying or at least making them hesitate. Also, everyone in bubble areas below age 40 knows someone in financial trouble due to the suicide loans, HELOCs, or normal financial distress. I

The second bit is most of the remaining buyers recognize that owning a home in bubble markets is stratospherically more expensive than renting. Thus many, like my fiancée and myself, are adjusting first to the lifestyle home ownership would entail: less dining out, cutting costs, etc. Thus a delay of home purchase.

The third and I believe most important reason is that it is now impossible to save money for the first 5 to 7 years after buying. Most people know a financial cushion is invaluable. Thus, sensible buyers (about all who are left…) won’t be afraid of 2% appreciation. As long as home prices are at such multiples of incomes and appreciation is weak… they will put money away until their down payment and their financial cushion are sufficient.

Since the market cannot sustain current prices without continued fevered sales rates… we have a guaranteed drop in real estate prices. Everyone should have asked what happens when enough people are “priced out forever.” It has happened and thus this is the real estate market we’re stuck with. Press reports might slow the market a little further, but they are not the cause nor the cure.


1 comment:

AnalysisGuy said...

I just shot-up the Q3:2006 reports for Orange County, Inland Empire, Ventura, DC & New York

They join prior FREE reports on Bakersfield, Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, San Diego, San Francisco and Seattle.