The real estate market is a funny thing. Real Estate is similar to the stock market in that you have "value" plays, "growth" plays and "momentum" plays. One big difference is in the stock market there are a lot of buyers and sellers for every stock making the "investments" easy to liquidate (convert to cash) whereas in the real estate market there is just one seller and one buyer for each property making the "investment" not very easy to liquidate.
Today, all over America, there are many sellers and few buyers. Let's face it, "Cash is King". Another saying I have heard is the Golden Rule - "those who have the gold make the rules". Home and general real estate prices will have decline until there are an equal number of buyers and sellers a point which is known as either a balanced market or market equilibrium. Everyone wants to know when this balance will occur. As you have heard before, real estate markets are local so every area will have a different answer to that question.
In Michigan with many lay-offs and still more future lay-offs there are fewer buyers than sellers and it is conceivable that imbalance will continue for years, many years. Here in sunny Florida, our job market is not too healthy either but we do have tourism going for us. While we too have fewer buyers than sellers, I think we will recover a little faster than other areas of the country.
Last week I attended an Urban Land Institute program called Market Trends where the speaker was my good friend Mike Timmerman. Mike is a smart guy. Gutsy too. Mike said in 2005 things were "pricey" but still selling. In 2006 he said things were slowing down and could even slow down a whole lot more. In 2007 Mike said in hind sight we saw a peak in 2005 and we were (in June 2007) about 18 months into a predicted 36 month cycle. There is no science to predict how long a market will take to recover other than looking at past cycles and comparing them to the features of the present cycle. I want to be clear- Mike did not give a date and time when the market would be "fully recovered". However, he did say he thought this down-turn would last longer than more recent times such as the 1991-93 market. As I said, Gutsy. Well it turns out Mike may have called it just right. We won't know for another year or so but he is looking smarter and smarter as the months click by.
So, which way is up? I think there is a lot of anxiety with most living breathing people out there. There is the pending Presidential Election, more foreclosures are hitting the market every day, homes are selling for less than it cost to build them let alone what you paid for the same house two years ago. Let's face it, there is just not a lot of good news right now. So the immediate answer to the question is DOWN. As (asking) prices fall, more buyers will enter the existing home market and remove the deeply discounted homes from the listed inventory. As inventory declines, the number of sales will eventually match demand and then we will start to see slight appreciation...eventually. While I hate to see homes on my street sell for less than it would cost to build today, at least they are selling and that is the key to prices heading up.
I have a quick story for you about someone that called to sell me a lot near my office. The lot is just beautiful and is in a great location. In 2005 the lot would have sold for $300k. Today they are asking $85k and wanted to know if I had an interest. I passed on the opportunity and the reason I gave them was sure it is a good price compared to 2005 but with so many existing homes on the market for less than replacement cost, when would someone want to buy the lot from me to build a new home AND pay me enough to make a profit? The answer is nobody knows, so I passed. At $40k I would take the risk. At $85k I just cannot. If they reduce the price I may buy it. Until then at least I get interest on my cash.