Technology TransactionsWhy Broker Advice Will Become More Valuable
One of the great assumptions made by many in real estate is that prices are like the morning sun, they"ll always rise. You see this premise repeatedly and with some logic: Figures from the National Association of Realtors show that cash prices paid for existing homes have risen every year since 1968.
However, before getting giddy about such results it"s good to remember several points:
While real estate prices may have risen in cash terms, they may not have risen as fast as inflation for a given year. This means the value of real estate, as measured in terms of what the dollar can buy, actually declined in some years.
Although prices nationwide may have risen generally, that does not mean prices in every state, city, hamlet, and burg also rose.
In those cases where values have fallen, declines are also understated because they do not reflect the reduced buying power of dollars eroded by inflation.
Prices may have risen nationwide, in your city and in your community, but such increases have little value if they do not also include properties on your street.
Because real estate is typically a long-term investment, year-to-year price changes have been irrelevant for most owners -- at least in the past. But the fact that our economy has done stunningly well since the end of World War II does not mean we will forever see expansion, growth and rising home values in all places and at all times. As folks on Wall Street say, past performance does not guarantee future results.
The economic growth of China, India and the European Union mean that as a nation we have new competition. Our huge budget deficit ($413 billion in the past fiscal year) and vast balance-of-payments deficits (probably $600 billion this year) assure that interest rates will rise.
Here"s another reason for rising interest rates: America has been the world"s bread basket for decades. Our farmers -- a tiny percentage of our population -- have easily produced enough food to feed not only our citizens but huge numbers of people overseas.
But now, for the first time, the Agriculture Department tells us that food "imports are forecast at $56 billion, continuing a 40-year upward trend that will result in balanced agricultural trade in 2005."
Balanced? In plain language our vast agricultural surplus has eroded and commodity sales which used to offset import costs for goods and services are now gone. If the trend continues, if food exports decline and imports increase, the U.S. will become a food importer -- an astonishing reversal for a nation that folk-singer Woody Guthrie called a "pasture of plenty."
A year ago, for the third quarter of 2003, NAR said that prices in 124 metro areas showed strong gains -- 41 areas had double-digit advances and only two showed "minor" declines.
For the third quarter of this year, NAR reported that among 127 metro areas most showed price increases and 45 had double-digit price rises when compared with a year ago. This is surely good news, especially for those who own in metro centers with soaring prices.
However, NAR also points out that prices fell in 11 areas, including Canton (-1.9%), Dallas (-1.6%), Indianapolis (-1.2%), Kalamazoo (-3.0%), Louisville (-1.4%), Syracuse (-1.9%) and Waterloo-Cedar Rapids (-1.6%).
With little reservation it used to be that a good and logical real estate strategy was to buy as much house as possible because it made sense to own a huge appreciating asset. It also made sense to borrow as much as possible because rising asset values and generally-declining interest rates assured that with time the loan could be easily re-paid. The conditions which encouraged such thinking are still the case in many areas, but not everywhere.
It"s easy to pick winners when the tide is rising -- but not so easy when the waters are calm or even dropping. The changes we"re seeing mean the marketplace is becoming more complex and the stakes are changing. More than in the past few decades, it"s now possible to pick a loser. With less certainty one outcome is that local real estate services and the brokers who provide them are about to become more valuable.
For more articles by Peter G. Miller, please press here.