August 15, 2020

4 Questions You Need to Answer Today

1. Why are the prices of homes dropping substantially in today’s market?
Prices are dropping because of the anomaly that occurred during the market boom. Professor Karl Case of Wellesley College and contributing author of the Case-Schiller Home Prices Indices, a quarterly nominal housing price report, looked closely at the appreciation of median home value over five-year increments dating back to 1980 (see chart: “Appreciation Went Into Overdrive” His research shows that home values appreciated 26.5 percent on average for the 20-year period from 1980 through 2000. 

In the six years that followed, average appreciation was 89 percent. Prices are now adjusting to the inconsistent and unsustainable growth that occurred during the first six years of this decade. In other words, the market is not on the decline. Rather, it is moving toward stability, which will mean healthier markets in the future. 

2. How do I determine the direction of prices in my market?
Although there are no steadfast rules to determine future pricing, months’ supply of inventory (total inventory divided by the number of houses sold per month) is a great guideline. Review the STATISTICS link on the blog. A normalized or balanced market has five to six months of inventory. If 100 houses sell a month, there should be 500 to 600 houses in active inventory.  

Based on this principle, if you have one to two months of inventory, double-digit appreciation is likely to occur. Lack of supply will cause potential buyers to clamor over the few homes that are for sale, which in turn drives prices higher. On the other end of the spectrum—where many markets are right now—there is a seven- to eight-month inventory. With this abundance of supply, there simply aren’t enough buyers to support the number of homes for sale.

Current economic conditions will also have an effect on the direction of pricing, as pricing is directly connected to average income. Traditionally, the national average sales price of a home is two-and-a-half times the average household income. Through the boom years of 2004, 2005, and even into 2006, that ratio was distorted, reaching up to four times the average income. We’re now getting much closer to the 2.5 ratio. However, with unemployment rising, prices may have to drop further to stay in line with the average American family income.

3. Why should I buy now?
Any investment consideration, whether it be real estate, gold, or fine art, follows a predictable cycle with nine stages (see chart: “The Stages of a Market Cycle” Let’s start with optimism, the period in which many people are excited about buying a home. When the market is strong, people’s purchases quickly increase in value, which leads to euphoria, which can lead to rash decision making. 

 From euphoria starts a downward cycle. As prices start to fall, buyers go into denial, with statements such as “I’ll be in the house a few years, so this won’t be a challenge.” After denial comes fear, as prices continue to fall, followed by panic, despondency, and depression. After depression comes hope and then optimism (back to stage one).

The point of maximum risk for any investment is during the euphoria stage. The point of maximum opportunity is at the lowest point, between despondency and depression. That’s exactly where we are in many real estate markets today. Clients who are motivated and qualified to buy will be able to look at the market cycle chart and understand why now is the best time to invest in real estate.

4. Is homeownership really a good way to build wealth?
According to NAR, home values appreciate 4.5 percent annually on average. That’s a great return; however, very few buyers pay in cash. Most try to put as little cash down as possible. The amount of cash buyers put into their home determines their return on equity, which is the total return on the cash they initially invested. So the return on equity can be astronomical. It’s easy to see that real estate isn’t just a good investment; it’s a great investment.


Avoid These Common Shopping Mistakes.  Too often shoppers end up paying more than they need to.  Here are the most common shopping mistakes:

MISTAKE:  Assuming sale prices are attractive prices.  Supermarket sale circulars often contain some great deals – but they usually have items priced at or near their regular prices as well.

MISTAKE:  Shopping in the wrong department.  Cheese can cost twice as much in the deli or gourmet section as it does in the dairy section.  The brands may be different but the quality is usually as good.  Nut prices in the produce, snack and baking sections can differ.  Salsa is often more expensive in the snack aisle than in the condiments aisle.  Organic foods found in supermarket organic aisles usually are substantially more expensive than those shelved among nonorganic goods elsewhere.

MISTAKE:  Assuming items shelved on supermarket aisle endcaps and display islands are special deals.  For example, a display in the fruit section may have a sale price on strawberries but regular prices on shortcakes and whipped cream.

MISTAKE:  Not watching as prices are rung up at the register.  Watch the register readout carefully as items are scanned to catch mistakes as they happen.  Then skim your receipt for any mistakes you may have missed . . . preferably before leaving the store.

MISTAKE:  Assuming there is a one-coupon-per-item limit.  Most stores let shoppers use both a manufacturer’s coupon and a store coupon on the same item if both happen to be available.

MISTAKE:  Forgetting to peel of instant-use coupons from packages.

MISTAKE:  Thinking the largest-sized package will be the best deal.  Compare the per-ounce or per-unit prices listed on the shelf price tag.  If you have a coupon valid for any size, the smallest package is often the best deal.

MISTAKE:  Not adhering to the five-minute rule when buying prepared food.  If the preparation time involved is five minutes or less you may find it is worth it to do the preparation yourself.

Now that you have saved all of this money, it is time to make an additional contribution to the Buy A Home With Barbara Fund.  I am ready when you are!