He was reviewing the terms of his offer, initialing each page of the purchase contract when he abruptly stopped, shoved aside the papers, looked me in the eye and asked, “If we pay the listing price do you expect this home to be worth more five years from now?”
What I wanted to say was “Of course! Now sign the rest of the contract.” What I said was “I have no idea.”
Looking back over the last few years, I have given some pretty poor advice to home buyers and sellers. For instance, if you had asked me back in 2007 if it was a good time to buy a home I probably would have said “yes.” Did I expect property values to go up in the next four or five years? “But of course.” If you had asked me what I thought about you selling your home at that time I would have advised to first look at other alternatives. After all, property values were falling, the economy was in the tank, getting worse and demand for homes was weak. I might have suggested that if you had to move, consider renting the home until the market improved or if you were tired of looking at the old place, consider remodeling. There were always other options to selling the home during the worst market since the Great Depression.
As things turned out, most of my clients who purchased homes since 2003 have watched their property values drop below their original purchase price. And clients who sold their homes in 2007, despite my warnings, received a higher price than what was likely if they had held off until 2009, 2010 or 2011. With hindsight, I should have been screaming “SELL!!” to everyone who owned a home back in 2007 and should have turned clients away who wanted to buy a home.
In my defense, we all missed the signs of a prolonged recession and jobless recovery. There was simply no precedent to this prolonged economic calamity except for the Great Depression in the 1930s. Who would have expected history to repeat itself? Previous recessions affected employment and consumer spending, including real estate sales. Property values declined slightly but they quickly bounced back when the recession was over. This time was different. This massive loss in property valuation challenged our basic beliefs as to the security of the family home.
From the beginning, the housing industry remained relatively optimistic in its assessment of the future direction of the market. In 2007 the National Association of Realtors’ national TV commercial went like this: “When you have a family it’s always a good time to buy. … It’s a great move-up market ….This is the best market in years in terms of choice.”
Property values have sunk 47 percent from when Realtors aired that commercial.
Then in 2008, when it was pretty clear that the market was in a free fall, the Realtors came out with another national TV campaign; “Buyer opportunities have never been better.… A home isn’t just a great place to raise a family … it’s also the key to building long-term wealth. On average the value of a home nearly doubles every 10 years.”
Homes are selling today for the same median price as 10 years ago.
In 2009 NAR’s radio and TV commercials told folks “If you’re in a position to buy a home you’re in a position of strength.… Eight out of 10 economists agree that home prices will rise in the next five years.”
Eight of 10 economists were wrong.
In November 2006, when the county’s median priced home was $450,000, Robert Kleinhens, deputy chief economist California Association of Realtors, was telling his members: “It’s not likely we’re seeing huge erosion in home prices, and really do not expect to see that going forward.”
And this from Alan Nevin, chief economist California Building Industry Association, back in January of 2007, “We don’t expect any significant decline unless there’s some major economic shock, and we don’t anticipate that.”
In the fall of 2008 Keitaro Matsuda, senior economist with Union Bank of California, didn’t expect foreclosures to be as significant as they were in the 1990s. “Foreclosures will be a fact of life moving forward but I don’t think that can move the market as significantly as in the 1990s. The reason is the economy in California is on much firmer ground than we were in the ’90s.”
That firmer ground turned into a sink hole with 2 million Californians out of work and a half million foreclosures.
When the leading housing experts and economists can’t seem to get it right, how are future buyers and sellers expected to make intelligent decisions as to when it’s the right time to buy or sell a home?
Perhaps a more realistic expectation about owning a home is a good place to start. Too many homeowners believed their home was a financial instrument that could be leveraged to buy stuff. Others thought owning a home was a sure path to financial independence. It was a retirement vehicle for some and a frequently traded commodity to others. We purchased homes based upon their anticipated increase in value rather than their functionality.
No one really knows for sure whether property values will rise or continue to fall over the next few years. We must make decisions today based upon our current situation and realistic expectations. The family home may not be the best investment vehicle but it’s nice having a place to call your own.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website at kencalhoon.com.