The Economics of the Deal

The Economics of the Deal

“The big decline is essentially over. We may not be going up, but we’ve probably stopped going down. I would expect it to kind of track sideways for a while…” Wells Fargo Economist Jay Mueller gave that quote in response to a report on the S&P/Case-Shiller National Home Price Index that recorded its first upward move since 2006. It’s funny, because I could swear I read something like that back in May.

“Market bottoms sound great in theory, but they’re just too darn hard to identify while they’re happening. Instead of an identifiable bottom, why don’t we just focus on a bottom trough, a trough that we’re certainly in right now. Movements to either side of this current point are going to be prevalent.”

That was written by me, your Realtor in Lake Geneva, and I wrote that on May 12 of this year, in an article titled “Lifestyle Bull”. If you didn’t read it then, I’d love it if you’d read it now. The news today that home prices are leveling off comes as no surprise to me, nor should it come as a surprise to you. Some will credit the $8,000 first time home buyer tax credit for aiding this recovery, but not me. I think it had more to do with buyers that had sat out all of 2008 finally putting their big boy pants on and jumping into the market. I know I bought a home in 2009, and will probably buy another before the year is out, so I’m following my own advice.

There’s a problem with a report like this, and I’ll bet most of you are missing what that problem is. The problem is the way a report like this affects the mindset of sellers. Most markets are still soft to say the least, and many remain pretty rough. Sellers in both good markets and bad will point to this report as sort of an “Ah ha!” moment, and bolster their resolve to get closer to their asking prices. If you’re a buyer, even though this report should aid in removing some of your fear, this report isn’t a good thing for you.

While income and interest rates and employment statistics are indeed important to shaping the housing market, they’re most important in how they shape the psyche of a buyer and a seller. Unfortunately what is good for one isn’t good for the other. A nationally respected authority announcing that housing prices are on the rebound, sounds great for buyers and sellers alike, but in reality it isn’t. Buyers still want to get a great deal, and sellers are getting less and less likely to provide that deal unless they are personally under financial duress. In a market like Lake Geneva, where the vacation home market is fueled 100% by voluntary, discretionary buys, the properties that are offered on the market are also almost always discretionary sales. In other words, a buyer doesn’t have to buy, and a seller doesn’t have to sell. It’s called a strong market, a market where affluent buyers battle affluent sellers over fractions of percentage points, all the while losing site of the goal. A sellers goal should be to sell, and a buyer’s goal should be to secure a generational vacation home that will lay the foundation for memories that a primary home can never provide. Until those realities are understood by both parties, this stable Lake Geneva market will continue on a path towards a relatively light volume 2009.

If you’re a buyer in Lake Geneva, use this Case-Shiller report to strengthen your confidence in the market. If you’re a seller, take this report with a grain of salt. Yes, buyers are coming out in more significant numbers, and they’re displaying more confidence than they have over the past 3 years, but you must remember they’re still looking for a deal. If you’re a stubborn seller and you haven’t budged in price much, remember that these statistics also say that nationwide prices average 30% off from their peak, and even though the Lake Geneva market is off only 15% from the market high, buyers aren’t going to pay you your price unless they’re thoroughly enamoured with your property. To buyers- let’s get out and make some deals before seller confidence increases to a level where their motivation wanes. In my opinion, seller confidence is increasing in our market by the month, and buyers would do well to get out in front of that and negotiate a deal before sellers heads can’t make it through doorways. To sellers- don’t let your head get that big. It’s painful, and it’ll more than likely mean you don’t end up selling your home in 2009, let alone 2010.

To everyone- don’t forget about the Realtor in Lake Geneva who called this trend 3 months before Karl Case.

About the Author

Leave a Reply