While looking at property, I was asked by one of my clients “When do you think the real estate market will hit bottom?” My immediate thought was, “let me look into my crystal ball….Ah ha, there’s the answer….The real estate market will bottom out on Tuesday March 21st 10:18 a.m. PST 2008.” Before answering and instead of verbalizing my thoughts, I mentally went though his buying criteria. I knew he wanted a larger home, preferably a four bedroom with office, for his growing family. He wanted good neighborhood schools because he and his wife value public education. He wanted a rural neighborhood that was still close to “everything.” He wanted an open floorplan and nice backyard for entertaining. Lastly, he wanted it all within his budget (this is always the toughest requirement, especially for anyone living east of California). It looked as if Los Altos was going to be his family’s future home. It also appeared as if his home purchase was going to be a long term investment. Of course he had questions about resale value, neighborhoods, crime, and traffic. He was not unlike many of my clients. He was looking for a home that would also be a good long term investment for his family.
I responded by asking him why he wanted to know when I thought the bottom would hit. Since he knew that his home purchase was going to be a long term investment, why did it matter when he bought? He could just ride out any dips in the market. I thought that if he found the right home, he should buy it and enjoy it’s benefits. He knew that historically, if one holds real estate long enough, values have always risen. Sure some years values have risen better than others and of course some years values have even dropped. But over the long term, values have always gone up. How long is long term? What are some clues or indexes that buyers can follow to give them a hedge against a drop in values. In short, where is the market? and how can we try to measure where the market is?
According to a recent article in the San Francisco Chronicle, there are five factors that one could look for to aid in determining where the market is in its cycle: (1) number of existing sales – an increase in sales indicates a move toward higher values, (2) Building permits – an increase in building permits indicates that builders think the market is getting better, (3) Mortgage defaults – an increase in mortgage defaults indicates that the market may be heading for a drop, (4) Foreclosure sales – indicates more property may be coming available at a lower price and therefore values are likely to lower, and (5) Mortgage rates – lower rates help buyers get into property easier.
As a final response, I told him that I thought the rest of the year would remain flat and that if we saw a house that he liked that he would go for it. Fortunately, we found that house 2 weeks later and his family is now a happy homeowner.