Is it time to buy? That's a question I'm frequently asked. But usually it's about the stock market. Lately, though, it's a question that's asked about real estate. Whether it's a house, a condo or a second home, people are starting to take a second look at the real estate market. That's probably because the latest statistics are making headlines.
September sales of existing homes were 6.16 million, down from 6.3 million in August -- and from 7.2 million in September 2005.
The inventory of unsold homes was 7.3 million units in September, up from 4.6 million homes listed for sale in the same month a year ago. (And there may be many more sellers waiting in the wings, planning to list their home when the market "recovers.")
Prices are falling, too. The National Association of Realtors reported the biggest drop in home prices since it began tracking the data in 1968. The median sales price was $220,000 in September, down 2.2%, following a 2.2% decline in August. These two drops are the first time median home prices have fallen since 1995.
The story is similar for new-home sales, which have picked up slightly -- a 5.3% increase over August -- as a result of price cuts and incentives offered by builders. In September, the median price of a new home dropped 9.7% compared with September 2005. The median new home price fell to $217,100, the largest year-over-year decline since December 1970.
Buying in a Bear Market?
So, is it time to buy? The smart money says it's time to buy when everyone wants to sell, or as they put it on Wall Street, when blood is running in the streets. That's the secret of making the best of a bear market.
But the housing market is different from the stock market.
Declines in stock prices are far more visible -- and universal -- during a bear market. Stocks are "fungible." That is, 100 shares of
are like any other 100 shares of those stocks.
But all houses -- even ones built in the same neighborhood, by the same builder -- are slightly different. A two-bedroom condo might have better appliances or a more appealing décor than the same type of unit in the same building. So it's hard to make price comparisons in housing, even with the existence of monthly median statistics.
And there's another big component in the real estate market: visibility. Sale prices aren't published for weeks, until a deal closes. So it takes longer for a declining real estate market to be analyzed and to run its course. Meanwhile, changes in the well-known stock indices are tracked instantly and compared on a day-by-day basis. As a consequence, emotional trends tend to gain momentum more quickly in the stock market.
A generation of investors was scared out of the stock market by the 2000 crash and subsequent bear market. Many came to view real estate as the correct alternative for creating wealth. Now the differences in the two types of investments will become apparent. After all, the
has made new highs in a relatively short time period of time. It's unlikely that real estate will make a similarly timely rebound from its eventual low.
How Low Can It Go?
Stock market technicians watch charts and volume to predict market turns. But just as the Dow has traded differently from the
, some sectors of the real estate market have moved to greater extremes. As in the Nasdaq, with speculators in the market in places like Las Vegas, California and Florida, the price swings should be wider.
And you have to wonder if all the bad news is already figured into this real estate market. After all, these are relatively good times: unemployment is low, interest rates remain low and the economy is still strong.
Yet in the coming months, an estimated $1 trillion in adjustable-rate mortgages will be reset. Even at current low rates, monthly payments will jump for those who entered the market with low "teaser" rates. And those who have an "interest only" mortgage could see their monthly payments rise by 50%.
Even if the economy holds course, those mortgage resets could force a lot of people to sell their homes -- or default on their payments.
In fact, the foreclosure rate has been rising sharply in many areas of the U.S. It's been predicted that more than 1.2 million homeowners could face foreclosure this year. When you see television news stories about middle-class families being evicted, you'll know this trend has peaked.
In short, without some extremely and unexpectedly good economic news -- or a quick resurgence of inflation -- the housing market has little reason to turn around, and buyers have little reason to push prices higher.
It's a classic case of reality entering a market that has been moved to extremes by emotion. If you're a buyer, you can sit back and pick your spot -- unless, of course, you have a home to sell first! And that's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,
The Savage Number: How Much Money Do You Need?
in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.