June 3rd, 2005
The Sky is Falling! Or is it?
Mainstream media is having a great time these days predicting the collapse of the housing “bubble”. The New York Times has run at least four stories on the subject,“Good Morning, America” has started off its day with that lede and even Mr. Greenspan has admitted to “a bit of froth” in the housing market. It certainly makes sense, from a news view, to play this story. A huge number of Americans own homes and, typically, it’s their most valuable asset, so a story that describes that asset as threatened is bound to make readers sit up and take notice.
But for another view, you might want to check out the Wall Street Journal’s article of May 27th which describes the plight of several home owners who tried to “time the market” by selling their house and renting a replacement until the prices dropped. They are now priced out of their home towns. Market timing is a great way to lose money on Wall Street; it’s an even more hopeless strategy when applied to residential properties in part because a house, while it can be a great investment, is primarily a place for you to shelter your family. You need one, rented or owned. If you don’t like the price of Home Depot’s stock don’t buy it and your life will remain unchanged. If you don’t like the price of housing you’re choice is limited to which street corner on which to place your cardboard box.
Which brings us back to the question, “is the sky really falling?” I think not, at least in this area. As I’ve noted before, one of the hallmarks, I think, of a bubble is the lack of market discipline. Do you remember when Palm Pilot was valued, for six long months, for more than its parent company? Thirty percent of something was worth more than sixty percent of the same thing. That’s “irrational exuberance” and that’s a bubble. And you could see it coming, if you looked. I don’t see that kind of blind euphoria in Greenwich, yet. Over-priced houses aren’t selling. Heck, even some well priced houses aren’t selling, and that’s because buyers are remaining cautious. They won’t over-pay for a muffler, or a house, because they aren’t counting on its price increasing wildly in the next year to bail them out.
Lucy Krasnor of Strategic Mortgage has culled average sales prices from our MLS data and her work should prove reassuring. Beginning in 1986, when the average house price was $650,000, that average has risen steadily and, mostly in a restrained fashion: 7.1% one year, 10.8% another, 4.2% another, and so forth. There are some notable exceptions, including 20000, the height of the tech boom, when prices gained 22.8%, 2001, which saw a drop of 10% and 2004, which witnessed a gain of 23.6%. The latter would, if continued, certainly give rise to the bubble theory but it is not continuing – prices seem to be flattening, which is good, long term. Greenwich has always seen its prices jump in certain periods — if memory serves, the same house on Bramble Lane that sold for $75,000 in 1972 sold two years later for $150,000—but then normalcy returns.
Another point to consider is how many houses are being bought at one price, torn down or renovated and then returned to market a few years later. The average price in Riverside, for instance, may have doubled recently, but a good number of those houses are brand new, much larger replacements for the buildings that preceded them. That skews the average. Would I want to be a spec-house builder of a $6,000,000 house right now? Absolutely not (and I especially wouldn’t want to be the guy who’s putting up, on spec, a 15,000 sq.ft. house on Langhorne Lane). But neither do I think that the market for well built, well priced houses is in danger of collapsing. It is especially important now to position your house intelligently and not saddle it with an “in my dreams” price. If you do that, you’ll shine out from your competition and sell your house quickly and easily. There are still buyers out there, and there will be, I hope, for the foreseeable future. Don’t let Good Morning America tell you otherwise.
But Price it Right
I have now spent three consecutive Tuesdays looking at houses that are, in my opinion, wildly over-priced. What a waste of time. Over-pricing your house in this thin market borders on stupidity (okay, it crosses that border). You don’t need to set a fire-sale price, but be aware of what’s out there and don’t delude yourself that your house is unique. For all its charms, there are other houses out there just as nice, and many of them are less expensive.