What is easier to predict, the weather or the housing market?

Tough one! Hmmmm, let me think. We were supposed to have a noreaster' today but there is just a dusting of snow, so that was not an accurate prediction, at least not were I live. All the economic indicators show that we are recovering from the devastating "housing tsunami" and I am optimistic;  but what does it mean for those who are on the sides waiting to either buy or sell? Well, it is not that simple and many factors influence the recovery as everyone knows. So what is the good, the bad and the ugly?

1- The good news is that there is no such a thing as a National Real Estate Market, so if you are in CT, you may not be in as bad of a shape as in many other places of the country.
2-On average the value of a home doubles every 10 years. During the past 30 years, home values have increased an average of 6%. But during the incredible house boom from 2000 to 2007, many properties increased a whooping 19% annually!! I know this for a fact because it happened to me! There is no market that can sustain that growth without crashing for sure! So what is the "predicted" appreciation rate for the "New Real Estate Market"? What about 2 or 2.5%?
3- The not so good news are that if you are thinking about waiting for the market to return to the pre-crush era, well...you may have to wait a while.
4- On the other hand if you are trading, you will benefit from the same low price when buying.
5- Interest rates are at one of the lowest points ever, so instead of putting your money in the bank,  may as well invest it.
6- The average homeowner has 46 times the wealth than the average renter. Why? Because homeowners are paying themselves when they pay their monthly mortgage by acquiring equity. It is like a savings account if you hold on to it.
7- It is estimated that 60% of the average homeowner's wealth is their home equity.
7- Corrections in markets that have experienced exhorbitants home price appreciation are expected.

I am not making light of the millions of homewoners around the country who are in a really bad shape, but we have to look to the future with optimism and hope,  and really consider the true facts about homeownership. Just keep in mind that if you are ready, and can afford to make a long term ownership commitment; the bottom line doesn't change, there is no better feeling than having your own home!

Would you pay $10 for a gallon of milk?

What if you were told it was the best milk in town? Tasted like no other! In my home we consume about a gallon of milk a day, so my answer would be a resounding no. I would not pay that price, in fact I go out of my way to buy milk so I pay a price that fits my budget and that I think is reasonable. Now, I understand that pricing a home is not the same as a gallon of milk but bear with me.

Lets establish the meaning of simple terms for the purpose of understanding how the pricing of a home is determined.

1. Price: The amount of money asked for a home. Price may or may not reflect the market value.
2. Value: is an estimate of the price of ownership. The question is who estimates the benefits or the value of a home? This is done by potential buyers and not by the Realtor or seller. As a homeowner I can understand that a home has more value to an owner than what anyone else may want to pay for it.  Many times we may confuse the affection or emotion attached to it with value. I know I have been there. But when we try to sell it, your home becomes a product and as such it should be appealing to the most number of buyers.
3. Market value: Market pricing is the most probable selling price at a specific time based upon the current market conditions. Homes can and do sell for less or more than market price depending on individual situations. However, homes priced significantly above true market price usually stay on the market for an extended period of time.
4. Regression and progression: The principle of regression determines that over improving a home beyond the general price range of the neighborhood will typically not be financially justified. In other words, as a seller you will not be able to sell your home for much more beyond the top of the neighborhood value range, regardless of the cost of your expenditures. Conversely, the lowest priced home on the block or in the neighborhood is often the quickest to appreciate, as the presence of more expensive homes nearby tends to increase its value. This is the principle of progression.
5. Conformity: This principle states that homes in a neighborhood should reasonably conform in terms of style, price, range, size, features, etc. Although there are few exceptions to the rule, homes that do not match the neighborhood usually are more difficult to sell and sometimes sell for less than their square footage may indicate.
6. Contribution: The value of an item in a home may decrease as the number increases. A large home with just one bathroom may be hard to sell. Two baths may contribute more value, but four or five would not improve the value than two or three. Components in a home cannot be judged individually but on their contribution to the whole.

Now that we have all the terms out of the way, lets explore a little more about how we get to a market value price. It is very important to understand current market conditions in order to arrive at a fair price. There is no such thing as one value for a home. Each home might reasonable sell within a small range and this is depending on many factors such as:

• Availability of credit
• Employment conditions
• Inventory
• Sold properties in the neighborhood (usually appraisers consider homes sold within a mile and within the last 3 to 6 months).
• Appraisers

Other conditions that affect the market value of a home are:

·      Location

·      Condition of the home

·      Homes for sale in the neighborhood (homes that are going to be competing with yours for buyers).

·      Supply and demand

·      Sellers and buyers motivation                              

The fact is that homes that are priced at a Fair Market Value tend to sell faster and sometimes with multiple offers than those priced at above market value. Pricing your home higher than comparable listings may help other homes sell faster than yours!

How many buyers will see your home according to how it is position on the market?

Fair market value: 60% of buyers

At +5% above market value: 30%

At +10% above market value: 10%

Below –5% market value: 80%

Below –10% market value: 92%

Case study: A home is placed on the market for $310,000 when it should have been $289,000 to $280,000 (asking price), for a market value of $265,000 to $275.000 (selling price). After being on the market for an extended period of time and lowering the price multiple times to keep up with the market, the home went under deposit for $250,000. I am very curious to see what the selling price will be.

Conclusion: The seller could have potentially sold the home for $10,000 or $15,000 more had it been priced competitively from the beginning

How many buyers saw the home when first put on the market? May be 10 to 20% of them? Probably even more but then they compared it with others on the market and went on to buy someone else’s.

And because the way buyers search for homes online (to narrow the searches a window prompts you to fill up the maximum price, square footage, etc) if a home is above market value, it may just not come up on a buyers search at all!

What are the benefits of pricing your home at a fair Market Value?

• A potential faster sale
• Less inconvenience
• Exposure to more prospects
• Cleaner and/or higher offers

 Corrections in markets that experienced exorbitant home prices appreciations are expected, although in my opinion are needed. Otherwise, very few people could afford to buy home.

The good news!

1.      If you want to trade for a bigger or smaller home, you may sell yours for less but you will also buy the next one for less.

2.      Interest rates are still low so the cost of borrowing money is more attractive.

3.      If you can afford to make a long term home ownership commitment, then it is always a good time to buy or sell.

Now going back to the gallon of milk analogy. Given the same/similar product, would you pay the higher price? Wouldn’t you shop around for other options that suit your budget?

Conclusion: A value of a product (and a home becomes a product) is determined by how much someone is willing to pay for it.

If the price of milk reaches $10 a gallon, I would seriously consider buying a cow!

   

To buy or not to buy, that is the question.....

Wouldn’t it be great to be born with a life’s instruction manual and have all our steps mapped out for us? Something like - Life for Dummies- (or is it already written?) Volume one from newborn to 4 years (mostly pictures), then 4 to 10 years and so on. You get the idea. But then again, would you want to know the future? I am not sure. So life is uncertain, it is what it is. Buying a home also carries a risk, an uncertainty.  It is a big decision, but you can take some steps to make it a little easier. Lets remind ourselves how lucky we are to be living in a country where it is still possible to own a home!  Regardless of the current economic circumstances, owning a home is still one of the best investment decisions you can make. Here are some of the questions I pose to my clients, especially first time homebuyers. The more you know, the better decisions you’ll make.

·        Is this the right time to buy a home? My question is: Is it the right time for you?

·        Get hold of your finances. If you do not have a budget, this is the time to make one. The important thing is to know where your money is going. If your monthly mortgage payment is going to keep you awake at night, you should reconsider.

·        How long do you plan to live in the home?

·        How many rooms do you really need, as oppose to how many you want?

·        Walk the neighborhood you are interested in, talk to the neighbors, visit during the day and at night, it is the only way to know if a neighborhood is the right one for you.

·        Do you have cash reserves to make mortgage payments in case of unforeseen circumstances?

·        Have you considered the cost of maintaining a home?

·        Get pre-qualified or better pre-approved for a loan. Very important. It is a waste of time and energy to look at homes that you may not be able to afford.

·        If you are buying a fixer upper count on having some extra money available. Renovations most of the time go over budget.

·        Once you have been pre-approved for a loan, and this some is extremely important, DO NOT go on a shopping spree for new furniture, household goods etc. Banks are known to pull out credit scores 2 or 3 days before closing and if the ratios between income and expenses have changed, they could pull the plug on the loan.

·        If your credit is not the best, wait, improve it and then apply for a loan. In the past consumers with lower credit scores could get a loan but would be hammered with very high interest rates. Buyers beware!

·        I think of my home’s equity as my savings account and use it when or if it is absolutely necessary. I hope you can do the same.

·        Once you own your home, walk straighter and stand proud, you have done it!

Every accomplishment starts with a single step and these are my baby steps at blogging…. well…I am more like at the crawling stage. I would love some feedback. Thanks