As I witnessed first hand very early in life, there are frenzied markets when everyone is running around buying like maniacs, and they can last a long or short period of time, but when they are over they are followed by a very different emotion. The frenzy is followed by a subdued melancholy that is reminiscent of a Saturday morning hangover from too many cocktails. When it hits you, it slams you in the face like a brick. Well, that is how the wake up call came to us. At first it crept in, quietly, in late 2007. If you saw it coming, you could tell yourself, "no, this isn't happening. It is all in my imagination." It appeared almost like a dream. But it was real. By the beginning of 2008, if you are like me, you saw the tidal wave building, and you knew there was no turning back. In fact, I told a friend in the fall of 2007, "Don't buy that house! It is going to be worth much less than that in a year!" I wasn't working then, but this was a friend of mine who had just moved back to Chicago from Switzerland. She could hold in a rental for a while. To many people who are unfamiliar with markets, they couldn't see it. To me, an intuitive, and also a seasoned realtor in Chicago, for over 23 years, it was so the tidal wave. We all know it hasn't stopped yet.
Markets are a function of supply and demand. We all know that. It sounds so simple. But why is it that human nature makes people want to buy when everyone else does. The reality, just like in the stock market, is the exact opposite. If you want to make money in real estate, then you need to be cold, calculating, and an outsider when viewing the market. When you are an observer, then you can watch how the markets are flowing, or not. What are people wanting? What are people valuing? It changes often. When you can be bold enough to determine what you value, and why you think it could endure as valuable over a long term, then you are using logic, not emotion. You see, that is the problem. Most people buy totally on emotion when they are buying in a frenzied market. The key is to be able to put that aside and buy on logic. Then, you can make good financial decisions. The good investor is like Warren Buffet. They look for under-valued assets and buy them at the low. In real estate today, that means seeking out homes in the neighborhoods that you desire most, and looking for homes that are currently priced most attractively. Today, there are many such homes available. But, ironically, there are many fewer buyers than sellers, and that is why the market is stuck in the tailspin.
I suggest that from now on, you look at the real estate market the same as you do your investments. Study the market, and determine a few key variables: how long do I want to live in this home? How much do I think it is worth to me today? What can I afford, in keeping with my personal financial plan, to spend monthly on owning a home? What am I willing to do to make a deal happen?
When you can answer these questions for yourself, you will feel empowered, and in control of your decision making. That is where you need to be before you "fall in love" with a house. It has to be much more than a love story. Yes, you have to love it, but the emotion can actually come as a result of sound logical thinking and strategizing. The market today is similar to many other times that have been challenging. I remember the late 80's when houses on the East Coast lost 70% of their value in Connecticut. It was horrible. But, I recall the similarity of a real euphoric market that preceded the crash, and that is typical. You see, all markets are cyclical, and move up and down for periods. So, when you feel the market building momentum, why not consider selling instead of buying? That is a strategy for success. Cash in your gain, and let go. But for some reason, unless you are a seasoned trader, most human behavior doesn't follow that plan. Most people buy when the momentum is building, and as a result they overpay for their house, if they need to sell it in a couple of years. That is another thing. When you are buying a home, you have to seriously consider how long you plan to live in it. This one factor can impact whether you make money or lose money when you sell significantly.
Let's take a look back at where we have been. In 1982, when I graduated from college, the interest rates were beginning a slow climb that didn't end until 1983, when the rates were stabilized by Paul Volcker. It took few years thereafter for the go go market to emerge. And it did. By mid 1987, there were signs that the Condo Crash of the late 70's was behind us. That was an effect of a flurry of rental buildings all converting from rentals to condominiums in a short span of a few years. In hindsight, there was no way that the supply and demand would meet happily in the middle of each transaction. As a result, the market crashed soon after all of the inventory had been swallowed up. But, as I indicated, if you step out of the market and assess it, prior to jumping inside, where it is difficult to see things rationally, then you are more likely to employ the wisdom of logic. Emotions will take over unless you use your discipline as your guiding light. Follow your plan of inquiry, and stay focused on it, and then you are less likely to get sidetracked.
So, we can call the year 1987, a turning point, or a point of equilibrium. By that I suggest that the supply is happily meeting the demand at a point where the market is happy. No one feels short changed, and no one feels depleted. Both sides of the transaction are satisfied as buyers and sellers. But, by 1988, there is a subtle shift in the air, like a wind picking up. The sellers are raising their prices, and the buyers are getting jumpy. This continued for another year, and then, boom. By 1990, the energy that had been growing, fizzled out; the sellers had run out of buyers, at the prices that they were willing to sell. And then the Persian Gulf War happened. So, we see boom and bust, and at the climax of the market is the point of equilibrium, just like in the stock market. The market high is like the equilibrium, or the point in time when people are willing to pay the highest price, and then, there is an emotional shift in the market. This can be caused by many things, but it can collapse markets overnight. I saw this happen firsthand while I worked at Northern Trust Brokerage, in Chicago, when it was believed that someone had attempted to shoot President Reagan while he was visiting Japan, in 1987. The stock market crashed in a few minutes. This reaction is totally emotion driven and can happen and does happen in real estate too. When a feeling takes hold in any market, that feeling can create a new reality. That is what makes the market move in different directions. The key is to learn to recognize where the market is in the cycle of: slow moving and tepid, to burning hot at the other extreme. The most fair and equitable markets are in the middle.
Since the lull of the markets in the early 1990's, the market was quietly finding its new comfort zone and buyers and sellers were very insecure as to what the true value of their property was. The market was slow, and insecure. Because the retrenchment had been somewhat severe post Gulf War, with depreciation of as much as 70% in some severe situations, people were timid. It took time to heal wounds. It was not until late 1998 that the steam began to pick up again. It came in slowly, and little by little, and then a bit more confidently until it was a hugely confident growing market place. By 2003, there were hair stylists joining the ranks of realtors, hoping to make some good money. Everyone wanted in. Then the frenzy began and greed set in. Let's buy 5 units and sell our contract before the closing because the price has doubled! I want more. Greed just bred more greed. Prices were out of control. And interestingly, as I mentioned earlier, if you were in it, you thought it was great. But if you stepped outside of the circle and looked in as an outsider, you could see, that it was a Tsunami waiting to blow in and throw itself all over the place. The market was so out of control, that only a rational, logical, strategist could see it coming. The homeowner thought it would just keep climbing, and deciding to cash out his equity, knowing it would be a great investment to diversify. "Yeah, right. Not, as Borat would say." The point of equilibrium was probably met in 2004, and the market's prolonged rally was really impacted by the shady lending that was not understood at the time, where people who did not understand the terms of their loan, were given mortgages that they couldn't afford at rates that were not sustainable, and if they increased, would bankrupt the mortgagees. And that is what happened. So, the market would have gone bust in 2004, had it not been the lenders deciding that they wanted to be invited to the party and prolonging the rally.
By, 2007, we had begun to question both Bernie Madoff and the banks who were creating an asset that hedge funds could trade based on the probability of default or not. What a nightmare! Why could no-one see that this was going to be a major financial fiasco? I don't get it. The only answer is greed. Once you step beyond the point of reaching equilibrium in a market, you are headed south. Then, the trend or rhythm of the market is to stumble for a while until you correct, and refind that equilibrium after another boom period. So, we will survive, and we will return to good times. But first, we need to lick our wounds and recover from the enormous greed that has played out over the past 5 years. We need to refind that point of where both parties are willing to accept that same reality.
So, remember the credo, "buy low, and sell high"; it will help you rebuild your nest egg. Stop reacting to the emotions that you are feeling in you and the people around you. With this new way of thinking, you will become a market maker not a follower. It takes a bit of gumption to be ahead of the market, but you need to learn to trust your instincts. If you don't trust your instincts, then find someone whose instincts you trust.
In closing, I want to share my optimism about today's market. When we are over-bought, so to speak, we have corrections, when speaking about the financial markets. Well, that process is also playing out in real estate today as we assess the condition of the home sales in Chicago, and its surrounding areas. For sellers, it may be a time to assess what the cost of holding your home for another year is, if you really want to move. Make a list of the costs associated with owning your property, and determine if your profit is enough for your future plans. If you bought your house 20 years ago, you may not even owe anything on your house. In that case, determine how you want to spend the next 5 years? Do you want to continue living where you are, or do you have other dreams? Answering the question will help you determine if now is the right time for you to sell. Because there never is a perfect time, but your life is happening now. It can't wait. For buyers, a quiet market is a great opportunity to get homes that are already priced on average 35% below where they were 3 years ago, in some cases. So, don't wait for the market to get steamy again. Be a trend setter and get moving!
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