scottsent July 28th, 2008
Many People Ask Me The Same
Question Daily
“Has The Market Bottomed Out
Yet?”
First, we have to understand market forces and what bottomed out really means.
For many, the question they ask is rather simple:
Buyer: “Have the prices stabilized? (i.e. neither decreasing nor increasing)”
Unfortunately, if we just answer that question we aren’t looking at the big picture. Right now, my answer would be misleading.
Realtor: “No, prices continue to drop as there is an excess of inventory and only a mere fraction of homes are selling”
This answer would lead most people to believe they should continue waiting it out, looking for the market to hit rock bottom (preferably where prices stabilize).
Since the only way we know how to determine if the market prices have hit bottom is to look at sales data (which is inherantly months old since transactions take months to close before this data is posted), then we will likely be on the upward swing of prices when we determine the prices have bottomed out.
Likewise, who cares about prices, really? Most people get tied up in the numbers too often to step back and take a look at what matters most to them - monthly cost of ownership!
If you look at the chart above, it points to the fact that monthly cost of ownership is really a function of both price and credit availability (interest rates). The harder it is to get credit, the higher the interest rates, the higher the required down payment, and the more ‘hoops’ you have to jump through.
So, right now the credit market is tightening up. It’s natural because these lenders have started to learn that extending credit to everyone is just too risky. What’s left is an increase in mortgage interest rates.
Rising interest rates generally mean you can afford less home at the same monthly cost of ownership. For example, if you could afford a $200,000 home at 5.5%, you may only be able to keep the payments the same by buying a lower priced home at 6.5%.
With the median home prices still in a free-fall, the net effect of rising interest rates and lower home prices may be negligible.
The graph above gives you a graphical representation of what happens when prices drop. Demand, naturally, increases. At the same time, when interest rates rise, demand at the same median home prices decreases.
Stagnation is when these two economic factors offset eachother - meaning you can buy the same home regardless of falling prices because the interest rate increases basically cancels out that benefit to you.
Recognize the tightening up of lending standards as a sign of the times. Be pro-active and understand market forces well before they are posted on the 5 O’Clock news. When everyone knows about the market ‘bottoming out’, it will generally be too late to benefit, and by that time the market will already be starting it’s upswing.