Thursday, September 07, 2006

Sellers: Are You Creating a Buyer's Market?

There is a popular theory that Real Estate agents create Buyers or Sellers markets.
If a market is perceived to be a Sellers Market greedy agents pushed up prices. If it is a Buyers Market greedy agents are pushing the prices down to make quick sales. Somehow greedy real estate agents completely control the real estate market all over the United States. WOW, now that's power!

Too bad it's not true. I'm going to let you in on a carefully guarded secret known only to real estate agents in the know..... Buyers create Sellers Markets and Sellers create Buyers Markets! Real Estate markets are part of the supply and demand theory of economics. Just think about it for a moment and you will see that it's true.

In 2001 rates were so low buyers realized that it was a good time to buy. However, as there are only so many people who want to sell at any given time, the supply of property isn't always in balance with the demand for it. A lot of people bought property from 1998-2001. Most people in CA move every 5-7 years meaning many potential sellers were not ready to sell. You now have a market where there is an imbalance between those who want to buy a home and those who want to sell. Guess what... YEP... Buyers bid up the prices on the available homes to take advantage of lower rates and suddenly you have a Sellers Market.

Today we have another scenario. Home prices increased at a furious and fast pace. Interest rates began to rise and potential buyers were having a hard time qualifying for homes. While many buyers got caught in the interest only, negative amortization loans a lot of buyers figured out that these loans might not be such good deals. Again supply and demand kick in to the market. Some Sellers realized that the real estate price boom would eventually stop and decided to sell while prices were still high. At the same time Buyers, who were having a harder time qualifying at the higher rates, decided to step back a bit. Suddenly there is lots of inventory and fewer buyers. Sellers, who forgot that houses don't always sell in two days with 10 offers, began to panic. You see Sellers offering price cuts and incentives to agents. Within a few months the market has turned and it's now a Buyers market.

None of this is bad. It is how a normal market should function. Changes in price reflect changes in the market. Real Estate markets always change. Prices go up and they go down. In California we have been very fortunate because what has gone down has always gone up. I remember selling homes in east Manhattan on 50x150 lots for $125,000. At that time real estate articles questioned how buyers could continue to buy homes at those prices. Many buyers were waiting for the prices to drop as they were too high. Sounds familiar doesn’t it?

In the last 20 years prices in Los Angeles County have been stable, gone up, gone down and gone up again. In 1986 the median price for a home in LA County was $135,393. In 1996 at the bottom of the market the price was $172,888. In June of 2006 the median price is $522,500. Prices will level and possibly decline slightly but it is highly unlikely they will drop to 1986 or even 1996 levels. Barring nuclear disaster you will never again see a home in east Manhattan on a 50x150 lot for $125,000!

Buying a home should be determined by factors other then just profit anticipation. Home ownership is a long term investment. If you are looking for quick short term gains then the stock market may be a better choice for investment. If you are the betting type and are gambling on home price increases to make lots of money fast then Vegas may be the answer.. at least if you lose they may give you a hotel room.

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