December 2008 newsletter

To buy or not to buy?

BusinessUps&Downs. Original image at http://www.culturaleconomics.atfreeweb.com/111%20114%20MBB%20Macro%20Graphics/Macro/Fig%206.1%20Business%20Cycle.jpg

That is the question

Perchance to dream indeed!

Depending on who you talk to, prices are going to stay the same, continue to rise (albeit more slowly), or drop decidedly downwards.

But who really knows? The answer doesn't simply lie with the positive thinkers, the naysayers, or any other real estate guru or forecaster.

No, forces well beyond the housing industry itself are at play -- or will be -- and, to a large degree, they're both political and economic, not to mention worldwide rather than confined to one particular nation or continent.

Even so, there are a few observations that I'm not afraid to make, if only with the hope of putting things into some perspective.

Market cycles

House prices have gone up, come down, and then gone up again as long as most of us can remember, especially during the last fifty years. In truth, though, this pattern has existed ever since it was possible for people to buy a roof over their heads. Some pundits point to the Law of Supply and Demand as the determining factor, but this is an oversimplification. Admittedly, there is or there isn't a balance between sellers and buyers at any one time, and this undoubtedly and appropriately adds or removes pressure on prices. However, the overall economy also moves up and down through the years and not necessarily in harmony with its housing sector. Times of plenty may be accompanied by soaring house prices, but buyers will also sometimes outbid one another when money's hard to come by.

The one absolute certainty is that each downturn (be it in housing, anything else, or just the general economy) will be followed by a recovery. The length of time between the ups and downs usually varies and the causes of both may occasionally defy explanation, but a further certainty is that the overall trend is a line sloping upwards. Rarely, if ever, does a second downturn drop to the level of its predecessor and, almost always, a recovery will surpass the height of the one that preceded it.

Say that it's progress if you like, but the prospect over any length of years is exactly that: progress.

Moreover, it can be argued that it doesn't really matter what you pay for a house. In the long run, its value is going to rise above its purchase price.

Time is of the essence

From the last conclusion, it can be added that time is needed before value increases -- as the difficulty of a quick flip can sometimes prove by default. Housing is a business where success depends primarily on being in it for the long haul. In fact, there's some parallel to the general belief that you need to be in any business for five years before you'll make a profit.

But time has another aspect to it, as in my fondness for advising clients about Making Haste Slowly. Hanging on to what you've bought is important, but so is a cool and careful look at the market in the beginning. On occasion, the choice can be obvious -- there's nothing else like it. Even then, though, there's sense in making sure -- what other properties can be bought for the same price?

Indeed, buying the first thing you see is seldom a wise decision. At the least, you should make sure that the alternatives are no better.

And right now time is, as it were, awaiting. The financial meltdown and international discussions about overcoming the repercussions cannot be lightly set aside. In other words, the question of whether you should buy today or wait until tomorrow is laced with uncertainties that are well beyond anything that you or I have much ability to control.

All told, I think you have to decide that if the time to buy is now you have to let tomorrow take care of itself. The odds are that you won't be altogether mistaken -- and you may end up outguessing everyone else.

The Obama impact

There's not much doubt that America's next president isn't rushing into what he'll do once he assumes office. (Can't help wondering if he's heard me talk about making haste slowly!)

But the likelihood is a succession of well thought-through and thought-out steps to bring prosperity back to the country. Among them, of course, will be action to turn the real estate market around and stabilize the mortgage business.

In any case, it's a belief that the banks themselves are in agreement with. Their business isn't in owning homes. They simply want to finance them and make sure that borrowers can afford to make the payments.

My guess is that the gloom and doom will steadily give way to a reactivated market that's managed with the prudence that was tragically overriden by the chance of profit in selling mortgage backed securities -- and I suspect this move forward will be evident before too many months have gone by.

Better still, our own market could regain it momentum. I've kept saying that its recent slowness isn't justified, but I will admit that, as (I think) someone once said, when the elephant sneezes the mouse catches a cold.

The auto (im)pact

Another meltdown (of sorts) is the Big Three's persistent failure to make money the way they used to do. The reasons are complex and fingers can be pointed at both management and unions, not to mention overseas production designs and costs that are extremely hard to match.

However, both the U.S. and our own governments don't appear to be in a hurry to throw a lifeline to Detroit's executives. Indeed, whether they should have laid out $20,000 in private jet travel to Washington to make their case for help or not, it proved to be money ill spent. The reaction by politicians of most stripes favoured some drastic reorganization of the car industry's structure and, just as likely, its products. Perhaps it isn't a perfect analogy but, if our smokestack industries have been driven out of business by foreign manufacturings, our auto makers could be facing a death knell of their own making if they don't -- and very quickly -- change their ways.

A frightening prospect

Whatever help is forthcoming -- and the news changes by the day or week -- some decided stiffening (accompanied perhaps by a degree of major surgery) of what both President Bush and President-elect Obama refer to as a backbone of America seems called for and, on the whole, inevitable.

On our immediate doorstep, this could, of course, unfortunately see a shutdown of GM in St. Catharines. I don't foresee a permanent loss of jobs because of it, but some interim hardship would be an unavoidable consequence.

The effect on housing prices hereabouts would be no less dramatic. Most employees of the auto and its related industries probably already have homes on their own, but a pronounced change in the nature of local employment would put unmistakable pressure on today's asking prices. The present scarcity of buyers, whether induced by the U.S. subprime problem or not, would become a great deal more worrying. Although the supply and demand law isn't as quickly applicable as economists like to argue, the unlikelihood of offers is going to encourage sellers to think twice about insisting on what they want to get for their properties.

At the least, the prediction of falling prices isn't ill-founded if GM et al no longer remain a primary contributor to Niagara's economy.

Worth a try

Warren Buffett has said that the best time to buy is at the bottom of the market. This may not yet be the case and, as I've implied, any sudden drop in prices is likely to be temporary, if only because a government lifeline is almost certainly going to include relief to soften the interim job losses.

Nevertheless, the present time could, as I've also suggested, be as good as any to put an offer forward. The fact that it may be the only one a seller sees could allow you to take a good ten percent off the asking price -- and any self-respecting listing agent isn't likely to recommend dismissing it out of hand.

In fact, if we give the politicians time to generate an economic recovery -- which I've no doubt that they'll do sooner rather than later -- you could come out ahead of other potential buyers who think they're better off to wait.

More than anything, it could perhaps prove to be a well chosen Christmas present!

And on that point, I'd be greatly remiss if I didn't extend my very best wishes to everyone for the holiday season ahead of us.

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail addressed changed as above on Nov 3 2007

website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com.