Meet the Street: Market for Homes Still Favors Sellers

The record-setting figures for January existing home sales that were announced earlier this week seem to portend continued strength in consumer spending and, perchance, a turn in the economy, says Glen J. Buco, executive vice president with West Financial Services, a financial-planning company in Annandale, Va.

Glen J. Buco Executive Vice President West Financial Services

Recent Meet the Streets

Gartner's Avivah Litan

Federal Reserve Bank of Philadelphia's Dean Croushore

Morningstar's George Nichols

Lehman Brothers' Matt Zolin

First Albany Asset Management's Hugh Johnson

Driehaus Capital Management's Richard Driehaus

Seasonally adjusted existing home sales for January were at an annualized rate of 6.04 million, up 16.4% from 5.2 million units in December, the National Association of realtors announced Monday.

As for what this means for people looking to buy or sell a home, Buco believes that prices are reaching their peak and that mortgage rates will remain attractive for possibly another 12 months. Both these factors, he says, translate into a seller's market in which buyers should tread carefully.

Here's Buco's take on what to look for if you are in the market to buy, sell or finance a home.

TSC: Did last month's strong figures for January sales of existing homes, up 16.2% from the month before, surprise you?

Buco: It's not surprising because interest rates are so low that you see a lot of real estate activity and refinancing. Among my own clients, a lot of them are refinancing and buying larger homes.

But I am sort of surprised at the strength of the numbers. They seem to indicate such a strong vote of confidence that there could be a turn in the economy. In fact, I thought existing home sales would be slowing down somewhat because they've been very good for so long.

The consumer real estate market has continued to surprise economists, financial planners, Realtors and bankers. Consumers are out purchasing, whether it's automobiles or housing. Consumers have shown a lot of strength, which is surprising given all of the worries over unemployment and Sept. 11.

TSC: Do you think this momentum in residential real estate sales can continue?

Buco: Yes. I don't see any reason for the banks to change mortgage rates significantly in the near term, or for consumers to lose their continued enthusiasm to buy. The real estate market could continue in this vein for another year. Whether that will continue another year after that is hard to say because it will depend on how much interest rates rise, on the one hand, to dampen enthusiasm, and how strongly the economy rebounds, on the other, to buoy it.

But in the short term, over the next 12 months, I see no reason why the residential real estate market won't remain strong.

TSC: What does this mean for someone thinking of buying now? How hard will it be for them to get good prices?

Buco: It's close to a seller's market, which means that any buyer has to proceed with caution. You don't want to be buying at the top of the market. You look at the cycles as we go through them here in the Washington, D.C., area. The values have gotten back to and, in many cases, have exceeded where they were in the late '80s and early '90s. But it took a long time to get there, and if we see interest rates start to go back up, we are going to see adjustments on market values and activity.

If you're looking for a home for shelter, that's one thing. But if you are looking for that home to appreciate in value and to grow your net worth, I think you have to be cautious. I think we are nearing the top of the market. I would be very cautious in terms of buying now because the prices are very high and may not exceed these levels for some time to come. I see little signs of real estate doubling in value anytime soon.

TSC: What advice would you give to a seller?

Buco: The problem with selling is, what are you going to do on the other side? Are you going to rent, or do you want to buy a similar or larger home in the same market? In those cases, you are in a tight spot. Prices may be peaking for homebuyers looking to the long term. But for sellers looking to move to someplace reasonable right now, they're problematic.

But if you are selling to make a change -- whether you are retiring or looking to downsize or to move to a different area -- this is a great time. The real estate market is now providing very good opportunities for sellers to get good prices, but they have to really think about what they are going to do on the other end. If you are a person with an opportunity to sell at a good price and you have somewhere to go, this is probably a great time to take that cash.

TSC: What do you think will happen to mortgage rates over the next year?

Buco: I would expect that mortgage rates will probably go up by the end of the year. Interest rates were pushed down more than the Fed would have liked because of Sept. 11. I expect some adjustment back up because they had to push interest rates down so low to jump-start the economy. Then, as the economy starts to grow, I would expect interest rates to go up again.

>To order reprints of this article, click here: Reprints