If you talk to any active real estate professional in the Lafayette real estate market, or anywhere in Lamorinda, they’ll tell you that this has been a challenging year for sellers, particularly as you cross above the $1M price point. Managing expectations, the realities of market price levels, and the stress of protracted market times has been challenging for most of us. I always want the best for our clients, and telling them something that is at odds with what they want to hear can be difficult. I believe in being honest with people about the market, a well as housing valuations, regardless of whether they are a buyer or seller. On several occasions, I’ve tried to talk a client out of buying a particular property when I knew that it was over-priced to the market or would be problematic for them to sell in the future, and I’ve suggested to some people this year that perhaps they should not sell if they “need” an unrealistic level of proceeds from their sale.
The #1 question that most agents are being asked is “What will the market look like next year… should I wait to sell?” As one of my biz school professors once said, “If you take all of the world’s economists and line them up, they’ll all be pointing in different directions.” If I had the answer to this question, I’d also understand what impact the European economic meltdown will have on the US economy, how high interest rates will rise, and a plethora of other unknowns that even Warren Buffet might struggle to know. All we can do is try to draw from the wisdom of much more learned and credible sources… read their opinions, weigh their analysis, and ultimately form our own opinions.
So, back to the question at hand. Facing longer market times than they would like and facing a market that has been less than hospitable in the upper price ranges, many sellers are wondering what to do. Should they “wait out” the market, lease their home, take what the present market will yield, etc? Over the last several months, I’ve told clients and prospective clients that I believe we are bouncing along the bottom of the market, and that it may take several years for us to see renewed appreciation at “normal” levels of 3-5% annually. At the upper end of the market, I’ve been more cautious, fearing that there is still some downside risk as foreclosures impact the segment and increased inventories affect the supply demand relationship — softening prices.
Regardless of what you think about Goldman Sachs, they are still a formidable presence in the financial markets, and their market opinions are still worth considering. In today’s Goldman Sach’s “US Daily” newsletter, the following prediction was articulated, “As discussed more fully in last Friday’s US Economics Analyst, we expect further declines in house prices during the next two years. With the support from government housing policies expiring, we expect the overhang of existing houses and the rise in mortgage delinquencies to take their toll. Specifically, we estimate that the 20-city Case-Shiller index will fall by 3% over the next year and another 1% over the following year.”
So, let’s assume you are the potential seller of a $2M home and Goldman is correct. If the home is worth approximately $100k less in two years, it will need to appreciate roughly 5% in year three to get back to where the value is today. If you factor in the cost of home ownership, market risks, cost of capital, etc., I think it makes a fairly compelling case for being realistic about today’s market and selling in 2010. If Goldman is wrong and the market turns up next year, then it’s clearly better to wait.
I think that it all depends upon where your home lies along the value spectrum. The higher above the $1M price point, the greater the risk and the more likely it is that Goldman will be right. Personally, I’m hoping they are wrong, but my gut tells me that they aren’t.
