Buy low, sell high, the universal principle of investment and if it were as simple to implement as it sounds we would all be reaping the rewards.
The real skill is in best determining where the bottom of any market is before it passes by and it takes a few months of steady value increases to know we have hit it. It also lies in having the confidence to step up.
The logic one needs to apply is really no different than that used by a practical shopper in Wal Mart. When an item you have wanted goes on sale you snap it up, you don't shy away from it because the price has dropped. Perhaps if the headlines you've been seeing for the last six months read "Sweater market in trouble" then shopping for sweaters at any price tends to become an unnerving experience. That is exactly what happens in Real Estate and the media hyperbole typically overwhelms the opportunities lying within.
You can wait until the eventual upswing confirms the bottom has come and gone but by then the sense of urgency is returning to the real estate market and the squeamish have become frenzied buyers once again taking to the streets to stake their claims. Vendors quickly become aware that the negotiating control they lacked when prices were stagnant or heading south has now shifted back over to them.
Ok, so where are we now on that curve? Have we hit the bottom yet?
In Ontario and much of Canada over the better part of the last year demands for housing have softened. The biggest factor is the down shift in consumer confidence brought on by what we are seeing in the United States, and to a lesser degree here at home. It is a self fulfilling prophesy. The news tonight interviewed a couple in the mall and asked if they will be spending as much this Christmas. The answer was a resounding "no, the economy is too unstable." Meanwhile they stated their employment situation is unchanged. They and everyone are paying far less for gas and heating fuel than a year ago. Chances are they are in better financial shape all around than last November but the mood has changed.
Responsible spending within our means is taking hold, what will we do? Less spending and less borrowing to spend means fewer goods need to be produced by companies that expanded to accommodate a boom without any thought to it ending at some point. Now companies are downsizing to adjust and unemployment numbers are on the rise. The local widget plant is laying off 200 workers and when we see it on the six o’clock news our consumer confidence drops a little bit more and so on….
At some point when we begin to sense things are stabilizing the media hype shifts to everything is rosy mode. Stories on new and expanding businesses, profit gain and closing bell increases on the stock market get people excited and they start to spend their money and up their visa limits once again. New housing starts increase and we all do our happy dance spending and buying for a few more years. Donald Trump and Warren Buffett probably read Marshal McLuhan's works.
In the US it isn't quite that simple. More than just confidence has shaken their financial foundation. Their experiment with high risk lending has put them into a situation that will take a couple years at least to correct. Hopefully measures will be put in place to assure it can’t happen again, measures like we have here in Canada already that regulate lending practices.
Right now in the Barrie area, home sales are down; the number of active listings continues to accumulate with the inventory of resale home listings at record highs. Residential real estate prices on properties under the $250,000 mark have held their value and for the most part, continued to climb during the past year, all be it at a slower rate than in each of the previous eight years.
The under $250,000 range has been the most active for sales over the past year in the Barrie area. This is the price range most first time home buyers default to where carrying costs remain within range of what they were comfortable with paying in rent. In each of the next few higher $50,000 ranges the percentage of total sales drops lower and the gap between initial asking price and the percentage of initial list price received on sales drops as well the higher you go. A combination of factors is challenging sales in the above $300,000 range, The first and most obvious is higher carrying costs and tighter qualifying requirements. A wave of fiscal and environmental conscience has started to effect the housing industry the same way it has impacted on the auto industry. The Hummer is out, the Prius is in.
During the housing boom we just came through you saw a return to low interest rates that allowed many the opportunity to buy their first home. Builders responded in kind with record numbers of new home starts in most years. Many of these people bought townhouses or lower end homes being what they could afford, then within a year or two these buyers realized their home had appreciated by $25,000 to $50,000 and they now qualified for more and had equity to trade up into a bigger and better home with little perceived impact on their monthly budget. (One more entry level home for the market and the next first time buyer and one more buyer for the higher end market homes being churned out as fast as the land could be cleared.) That cycle has slowed and most who bought their first home in the past couple years are sitting tight and many who bough a higher end home in the last few years are looking to sell and find something more affordable. Those higher end homes are taking longer and longer to sell and are accumulating to record levels in and around Barrie and other Ontario communities.
Homes over $300,000 could drop more in price before we see a levelling off and a climb once again. This could take another year or so. Home buyers whose price range is under $300,000 are less likely to see average prices drop much if at all any time soon. What buyers have in their favour right now is a slower market where the urgency of the seller often translates into substantial dollars saved off the list price through negotiation. (This is where your Realtor proves their worth.)
A home listed for $250,000 today could possibly be had for $235,000 to $240,000, maybe less after some back and forth bargaining. Once the market is in full recovery mode the seller is more likely to guard the list price, confident that demand will bring other buyers willing to pay more.
Questions to ask yourself;
Are homes in the price range I am interested in more like to go up or down over the next year? How much more? Am I going to save anything by waiting a year? Are interest rates more likely to go up or down if I wait a year? Will negotiating strength work for or against me a year from now?
The fact is interest rates are low and pressure will likely take them even lower in the coming months. Negotiating strength still lies with the buyers due to the abundance of active listings and a hesitant buying public most of which to their own disadvantage will not step into the market until it heats up again. It is a good time if you are buying your first home. First time buyers are benefiting well from our current market conditions.
As I said in a previous post. Stop reading the paper and watching CNN and spend some of that time looking at the nice thick catalogue of homes for sale.
