Ever Hear of Buy Low Sell High, or The Herd Mentality?
January 8th, 2012The question is with interest rates at all time lows why has the Springfield housing market just experienced the fewest home sales since 1998 during 2011?
My theory has always been it’s about jobs, however is economic fear a factor? How about misinformation causing inaction? What about misinterpreting information?
The lack of jobs is clearly a factor. The fewer people working, the fewer new jobs being added, and those fearful of losing their jobs all impact a families decision to buy a home. No job and the decision is made for them.
What about fear for their economic future? Perhaps they are renting and could qualify and afford to buy a home but they are waiting to see which direction the economy goes first?
For this family, if they know they will be in the Springfield area for at least five years or more, are ignoring the basic good financial act of buying low to sell high. Besides, if you wait for all the lights to turn green before going to town, you’ll never get there.
Although many will hear the local association of Realtors boast about a new record high median sale price at $110,000 in 2011, up a whopping $100 (that’s right, one hundred), they should not think prices are high, or that prices are rising. That would be a classic misinterpretation. Here’s why.
There are several driving factors in home prices. The cost to build a new home is finite. Land, labor, materials, permits, EPA mandates all contribute to a high cost to build today, however provides support for existing home sale prices. Since we are at a decades low in numbers of homes being built, this isn’t as big a factor as during a sellers market.
The number of foreclosures has the opposite impact of new homes. Banks needing to liquidate property sell at below market prices pulling down the price of existing homes.
Interest rates are a huge factor because they determine buying power. Lower rates typically support higher prices. This is the reason we did not see a decline in the median sale price in 2011.
As an example; at today’s 3.75% 30 year rate, the principal and interest (only) on $100,000 is $463.12 a month. If rates increase to 6% (8% is the twenty year average) the payment increases to $599.55, nearly a 30% increase.
Nobody knows for sure when rates will go up, but rates will go up. The trillions of dollars the Fed has pumped into the money supply has already devalued the dollar and economists predict when a recovery finally takes hold we will see double digit inflation rates again. Then watch what interest rates do!
It happened before in the 1980’s when I bought my first house. My interest rate? 14.75% on a 30 year mortgage with a loan of $35,000, the payment was $435.57. For what I paid for $35,000 in the 1980’s I could have borrowed $94,000 today.
The final factor that influences prices for homes is the number for sale. The fewer homes for sale the higher the prices. Last year we averaged 268 home sales a month. There are 1430 for sale today with thousands more that will become for sale during the year. There’s no shortage of homes for sale!
So to clarify for you, just because the median sale price increased doesn’t mean prices are rising or that prices are high. The weak demand for homes, foreclosures, sizable number of homes for sale, and an historically small number of new homes under construction means pressure is on prices to decline.
With the low median sale price in Springfield compared to the state and nation our prices weren’t high to begin with. Due to weakness in demand there are more sellers that have to sell, who are more willing to negotiate price than at anytime during my 25 year career.
When you combine this once in a lifetime interest rate with the local home prices anyone who doesn’t buy a home now is truly missing their opportunity to buy low to sell high.
What if life throws you a curve ball and you have to move? I recommend getting an FHA loan because it is assumable. Say you have to move and interest rates have increased to 8%. Home sales will be slow, however if a buyer can assume the balance of your loan at say 4%, you will sell long before a home seller without an assumable loan.
For homeowners who want to buy another home but are afraid their home won’t sell and stay out of the market, they too are missing their opportunity. When is the best time to sell? When you don’t have to.
Yes we only sold 3216 homes in our MLS in 2011, and yes I predict fewer will sell in 2012, however there will still be over 3,000 homes sold. Why can’t theirs be one of those? They can.
On Thursday January 26, 6:00 pm at The Hilton Garden Inn I will be hosting a free home seller seminar. You can learn how to get your home sold in this economy and be able to take advantage of this incredible, historic opportunity to get the lowest interest rates of a lifetime.
But then again people can also be afflicted with the herd mentality. I have noticed buyers rushing to the market to buy when it’s a sellers market and prices are up with no reason for the sellers to negotiate their price.
Whether it’s from the media reporting about a hot real estate market, or friends and family once again making real estate the most popular topic, the herd gathers and rushes the market.
In strictly financial terms this is a mistake. Once you buy an overpriced house, you will someday have to sell an overpriced house. You are throwing away equity on the purchase end and not realizing as much when you sell.
On March 23, 6:00pm at The Hilton Garden Inn I will be hosting a free home buyer seminar. The rules have changed, financing is more difficult, but this is an opportunity of a lifetime to buy a home.
Granted you won’t be stuck in the middle of a thundering herd to compete against, but what the heck is wrong with being able to take your time and do it right?
The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.
For those interested in registering for seminars e-mail from this site or call 391-1811 during the week. Thank you.
