Educating Buyers on Today's Market

Food for thought by Paul C. Bishop, Ph.D., Managing Director of Real Estate Research at the National Association of REALTORS...

Dispelling Buyers' Misconceptions
There's plenty of negative economic news now, and a lot of it is specifically tied to the housing market. Still, it's also true that a lot of misleading information is floating around. The national media tends to focus on the markets that have been hit the hardest, and ignore those where housing has remained relatively strong. It's unfortunate, because misleading information scares people. And when people are scared, it only makes matters worse. Consumer confidence falls, buyers hold back, inventories grow, and downward pressure builds on prices. Lower prices, in turn, raise foreclosure rates - and generate even more negative headlines.

Broader concerns about the state of the economy have also played a role in eroding home buyer confidence. Just like the housing market, economic conditions vary greatly from one geographic area to another. Jobs in some industries are much more secure than others. Buyers should be encouraged to look at their own situation. If they live in an area with good economic vitality and believe their job is relatively secure, buying a home - or trading up - is probably no riskier now than five years ago. In hindsight, this may turn out to have been the perfect time to jump off the fence.

Signs of Improvement
Even though prices have declined sharply in numerous markets, the latest quarterly survey from the National Association of REALTORS, released in August, shows that buyers are starting to respond to discounted home prices. Nearly a quarter of metropolitan areas showed rising home prices in the second quarter from a year ago, with greatly mixed conditions continuing around the country. But it was encouraging to see the biggest home-sales gains since the first quarter of the year were in some of the markets that experienced the steepest and fastest price drops. For example, compared to the first quarter of 2008, existing home sales in the second quarter increased nearly 26% in California, 25% in Nevada, and over 10% in Florida.

Rising Construction Costs Add to Price Pressures
In separate but related news, rising construction costs are having a significant impact on the price of new homes. A recent research report from the National Bureau of Economic Research found that 2007 construction costs were higher than median home prices in 33 out of 79 metropolitan areas studied. Once the excess inventory created by foreclosures is drawn down, price pressures will likely return, if for no other reason than the rising costs of new construction. Buyers entering the market now should be in an excellent position to build wealth over time.

Buying for the Wrong Reasons
One negative remnant of the housing boom was the mindset it cultivated, in terms of the reason to buy a home. Fueled by get-rich-quick books and television shows, too many buyers came to believe that houses were meant to be purchased, lightly rehabbed, then sold again six months later - or perhaps just six weeks later - at a handsome profit.

Perhaps more than anything, potential home buyers may need to be reminded that homes are better viewed as they traditionally have been - as long-term investments. Long-term growth can still be achieved in as little as three to five years, but not six months.

Homes are established investments that yield more than dollars. A home is a source of stability in life and, for many, a place to raise a family. When buyers look upon a home from this perspective, the dream of home ownership should appear increasingly viable once again.