Market Report: February 2006

Dear Friends:

Mid-February is always my busiest time of the year and this year seems no exception. Unfortunately, there is a real distinction between busy and productive. Buyers are starting to discover real estate and are nibbling at the market. Investment opportunities appear to be opening at a more rapid pace so I am very excited about that market. On another note, we are within two weeks of opening our first project in Madrid, I will keep you posted on that one.

--Jim

Someone Turn on the Lights

Thus far this year buyers are more interested in looking than writing. It is like the line of anxious middle school girls huddled along a wall in some dank gym waiting for the indecisive boys to ask them to dance. Both sides want to get together but no one knows how to make it all work. Buyers are frozen in the headlights; they stare into the brilliant light seeking some reassurance and finding none. The media and other real estate gurus are also guilty of providing more heat than light; nervous hand wringing about the market makes great copy but sheds little wisdom.

Sellers are not without culpability is this drama. The market is not what they dream it to be. Market price is nothing more than the agreement between two parties as to the worth of a property. I admire the resolve of the current batch of sellers. They are routinely fending off numerous entreaties from low-ballers and others not connected to reality. Yet this resolve is also contributing to the market malaise. Collectively sellers need to reduce prices at least five percent. Even that may not make a sale but it at least gets the party going. Someone has to be the first on the floor.

Agents have few tools in which to bridge the impasse. No amount of cheer leading seems to be able to motivate buyers. I know the buying public is awash in cash and has easy access to cheap credit. Therefore it is not a question of capability but of will. Agents cannot convince buyers to buy because it is more than just a case of money. It is about not being the loser in the game of musical chairs. The fear of failure and our uncertain future is what restrains buyers. Buyers are failing to grasp one irrefutable fact; prices in the latter half of 2005 were higher than the first part. While price appreciation decelerated in relation to 2004, prices still went up linearly in 2005 contrary to popular opinion.

Buyers have good reason to fear for their immediate future. But there are many more reasons not to fear this market. I think the buying public is too focused on the past. The past real estate recession was ugly and painful. The problem is that 1991 is light years from 2006. Our economic world is a very different place and most of us make decisions rooted in past experiences. It is similar to the parable of the blind men trying to describe an elephant. To put it another way, buyers are anxiously staring in their rear view mirror while sellers are staring ten miles down the road.

This lack of common assumptions is creating the stalemate. Both sides need to readjust their view of the economic landscape if there is any hope of creating some market movement.

One View of Reality

There is little doubt in my mind that we are in the midst of a significant correction and will be for at least another twelve to eighteen months. Money will remain cheap over this period of time and that will ameliorate some of the pain. Sellers will still be able to sell and walk off with some profit; less than expected but still a profit. Prices increased last year about nine percent in the Mission Hills market and we should expect less this year. But that is a far cry from losing thirty percent of the value of homes as happened just fifteen years ago. The chances of that catastrophic re-pricing is not in the cards. The forces of globalization have seen to that.

Globalization of money, which drives local markets, is the new joker in the pack. No one is really sure how this will play out but one thing is certain, the old rules do not apply. Removing the potential of very expensive money choking the market speaks volumes. As long as the buying public is enabled no crash is in the offing.

If you believe any of this then it is clear buyers are way too cautious. There are some real buys out there to be made. Real estate is still a proven path to individual wealth and I doubt anything in the immediate future will change that. The current down cycle will be relatively benign and not last past eighteen months. Those who can buy and hesitate will be the losers.

Lest you think me overly optimistic, I do have my own major concern; the economic state of the renting class. Their wages have stagnated in real dollars since 1990 and their ability to pay rents props up a huge portion of our local economy. I am sanguine about the housing market because the property class (real and potential) has most of the money. But that is a subject for next month. Then I will really get out my worry beads.

Click here to see Jim's past Market Reports.

> Send me complementary, custom MLS listings
> Contact Jim Scott for more information or with comments at jimscott@sqre.com