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It’s Not About Foreclosures. It’s About Pricing!

Remember the Boat Analogy

Many of our readers question why I spend as much time as I do on the foreclosure situation in the country. I want everyone to know that it is NOT an obsession with depressing news. I strongly believe that the wave of distressed properties (foreclosures and short sales) coming to market will dramatically impact house values for the rest of 2010 and probably 2011. I want to make sure that every seller and buyer remains on top of this issue so that they can best evaluate the options for themselves and their families. I hope every real estate professional understands the issue well enough to simply and effectively communicate the effect it will have on their customers’ decisions.

Obviously, to the families that can no longer afford their mortgage payments (or have made the decision not to make those payments), losing their home can be a harrowing experience. I have blogged in the past on where these homeowners can reach out for help to either keep the home through modification, or arrange for a more dignified exit for their family by doing a short sale. I even wrote of my own personal experience when I needed to transition my family because of economic difficulties. The sale or purchase of a home is very emotional under normal circumstances; in this market, emotions can be blinding.

What I am attempting to do is take the emotion out of the issue. I want to look at the business ramifications of the increasing number of distressed properties that will be entering the market at discounted prices. The sale or purchase of a home is not just based on emotions. It also requires a financial commitment by both the seller (establishing price) and the buyer (accepting the cost). There is a business component to price. When purchasing anything (even other emotional purchases like a boat or furnishings for a newborn’s room), price is always a strong consideration. We might wait on the purchase of the furnishings if we know the store is starting a sale tomorrow. We might decide to sell the boat at the beginning of the season because there will be less units available for sale.

A piece of real estate is no different. The people who are selling want to sell at the best price, and the buyer wants to purchase at the lowest price. There is a large volume of houses coming to the market at discounted prices. The demand for housing will be flat throughout the year. An increase in supply and a leveling off of demand will create downward pressure on prices. Buyers might want to wait until the ‘sale’ starts. Sellers might want to sell before the competing inventory increases.

In order to make the right decision, we need to understand how much of this inventory will actually come to market and when it will show up. I consistently report on the foreclosure situation to keep consumers up-to-date on this issue so they can make the right decision. Anything less would deprive both buyers and sellers the ability to most accurately access their options.

What does this mean to you?

FOR BUYERS

Prices will continue to soften. That does not mean that you should not go ahead with a purchase if you have found the perfect home. Every expert I have read is calling for mortgage rates to rise later this year. And remember, one percent (1%) increase in rates will wipe out a ten percent (10%) fall in housing prices.

There is also a price to pay for not moving on with your life (moving closer to work, getting that extra bedroom for the nursery you will need in another couple of months, etc.). Consider all costs when you make a decision and don’t allow the financial cost to weigh more heavily on your decision than it should.

FOR SELLERS

Accept the fact that your house will have much more competition as the year goes on. The new inventory of distressed properties will be on the market at discounted prices. So remember, you want to sell your boat house now before many other boats houses go up for sale.

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