Real Estate Trends 101

I know of few people in the Real Estate Market that don’t want simple answers to a complex issues.   Let us simply refer to it as “crystal balling”!

Thinking on it for the past few hours I found myself chuckling at myself wondering,  if only I had that crystal ball ten years ago.   Then I thought further and realized,  I’d had the “crystal ball” all along!   WE ALL DID,…We All Do!

The Real Estate Market operates in a peculiar yet predictable manner.   Here in the San Francisco Bay Area particularly,  San Francisco,  Marin,  Contra Cost, Santa Clara, Napa and Sonoma Counties,  and I’ll suggest most major Metropolitan areas around the Country,  this would be the same case as well.    There are,  as will always be the case,  exceptions to this but I’ve neither the time nor the space to delineate each geographical area,  I’ll just trust that you’ll be able to see the similarities,  should the apply,  in your area as well.

In the final analysis,  I’ve observed and studied many real estate markets and there appears to be strong,  consistent, similarities to the function that perpetuates these up/down cycles.

Fundamentally,  it looks like this:

We start first with “Demand” , triggered by a variety of factors but typically it is a blend of desirability (area) and relative property values.   That is,  relative to other choices (area).

Then,  we move toward “Outlook”, which is to say,  the perception on the part of the Buying Public as to the “hopefulness factor”!   If the “feel” is there,  the participants tend to be proactive.  Wiling/Eager to make a move.

Add to the mix,  “Money Costs” , or simply put,  cost and availability of Financing.   Also,  add to this the “creative” financing solution!   We’ve seen this issue be an extremely relevant issue through any cycle.

“Ability to Pay”,  is in some ways a component of “Money Costs” however it is a distinct,  stand alone,  aspect that can straddle “Outlook” as well yet can operate independent of either.

And then,  the “Absorption Point”,  which is the point when, Demand is curtailed by changes in “Outlook”,  “Money Costs” and “Ability to Pay”.

There’s surely more room for a more detailed discussion on each of these issues,  a host of near infinite variables that can be explored further however,  I like it simple and straight to the point and frankly,  dissecting them deeper will not change the observation,  it will serve only to broaden its scope!

Now,   I imagine that some might say that I’ve neglected one critical point!   Why have I not addressed the issue of “Supply”?   To be frank,  I wanted to avoid to lengthy a discussion on the subject and not as I felt it unimportant.  More so as I believe the issue is most relevant as it relates to “extremes” than the actual Cycle itself.   In other words,  if “Supply” is limited,  then the “Cycle” develops more rapidly and prices become more extreme.  In the case were “Supply” is reasonably abundant,  the “Cycle” develops at a more measured pace and the extremes are, well,  less so!

Here in my home town of Santa Rosa ( Sonoma County) , where the average home price is among the highest in the nation, the stage is being set for the next market “Cycle” which,  I believe,  will set new records for Average Home Prices though,  admittedly,  it will need to wait for the next “round”.   We’ll discuss this issue,  in greater detail,  another time.

For now though,   this Area Market as reached its “Absorption Point” approximately eight months ago and is now in a “correction spiral” which I believe will continue until we reach what I refer to as the “replacement cost” floor (another issue for later discussion) and we, sadly, have not reached this point yet!  Truthfully though, my great concern is that this floor will only be the ceiling.  There are far to many systemic financial problems the likes of which,  I predict, will make the S&L Crisis of the late 80’s seem mild, quite mild, by comparison.

I might also add,  in the Commercial/Investment market,  where the bulk of my business occurs,  there will continue to be some light in this tunnel for two to three years longer (than the residential market) as Investors look for “hedge positioning” however,  this niche of the market will likely prove to be the most catastrophic.  Why?  For two primary reasons: (1.) its collapse will occur as the ultimate signal of economic (consumerism) collapse which will illustrate how severely damaged the “native economy” truly is.  And (2.) The entities whose funds (financing) are used to finance these large Commercial Properties, will have and/or be in the situation of having their lack of liquidity, due to mortgage losses, strained the most severely, e.g., Insurance Companies and Retirement plans with large Real Estate Loan Portfolios.

Lastly, and as a side note, these events will truly show how inept our Political Machinery truly is.  No President, no Congress will be able to save it!  Why?  They’ve neither the knowledge base nor the courage necessary to address the real problems.  Perhaps,…they may not want too!

Hold on tight, it’s going to be a very bumpy ride!    In the end, nothing suffered, nothing gained!

Watch for my next “post”,  ”Staying Ahead of the Curve”!  You’ll not want to miss it!

Curtis C. Greco, Founder

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