The US real estate market

These are tough times for the US real estate market. Existing home sales continue to plunge, along with prices. Here in Orlando, FL there were only 924 contracts signed in September of 2007, down from 2054 in September of 2006, according to the Orlando Regional Realtor Association. During the peak of the boom, Orlando saw 3000+ contracts signed a month. Similar scenarios are playing out in metro areas across the nation. What happened? And where are home prices going from here?

First culprit, one that is not talked about much, is the media. Yeah they love to stick it to the lenders (and everyone else), and certainly there are others who deserve blame for this mess (we'll get to them in a minute), but first and foremost the media is to blame. During the boom years every other story in the news was about how home prices are going up, and how so many people are making money flipping homes & condos. They held these people up to be geniuses. Everyone wanted in the action so they could be a "genius". People were scared if they didn't buy now they'd miss out, and people dreamed of easy riches from buying a home, waiting a few months, and then selling it off. But of course this speculation driven frenzy couldn't last forever. There were too many people buying property just for the chance at easy money, and not enough people who actually wanted to live in them, which, believe it or not, is all that residential real estate is good for. Eventually people woke up this reality.

When things started to go south, all the media could talk about is the subprime mess and how the real estate market was primed for a huge fall. They've talked down the real estate market so thoroughly over the past couple years that now the opposite is true, people are afraid if they buy now they'll miss out on huge price declines to come. The media did the exact same thing during the stock market bubble. Here we go again...

Second on my list of people to blame are the speculators/buyers. Somehow these people didn't learn their lesson from the "dot com" bust. Everyone convinced themselves that real estate was different. I talked to many of these smug people during the boom years, it just sickened me how smart they thought they were. How long did you think prices could keep going up at 40% a year? Whose income is going up that much (besides yours I guess), and who is going to be able to afford these properties?

Third on my list are developers. Developers simply closed their eyes and kept building. Anyone could crunch the numbers and see that there was not nearly enough population growth occurring to support the number of new units being created. But who cares? They're selling! This is the new economy! Reality does not apply!

Fourth on my list is lenders. I know lenders are on the top of most people's list (especially the media, they make a very easy target since they're foreclosing on so many properties now), but lenders provided what the speculators wanted, if the players mentioned above hadn't created the situation, lenders wouldn't have had any loans to make. I know there were some shenanigans in the marketing of loans to the secondary market, but again without all of the get rich quick speculators demanding no doc loans, lenders wouldn't have started offering them.

So now that we're in this mess, where are prices headed? A lot will depend on the individual metro area in question. Every metro area is different some markets rose a lot more than others. And it will also depend on sellers. They need to finally accept that the prices that existed during the boom were artificially created and didn't reflect reality, and that reality has now finally set in. Here in Orlando for example I believe homes are overpriced by about 20%, when you look at peak of the boom prices. The reason we only had 924 sales last month is that most homes are still priced at peak of the boom levels, and buyers are not touching those houses with a ten foot pole. Many sellers continue to insist that they will not sell unless they "get their price". If this standoff continues, then prices will decline very gradually over the next 4-5 years before stability returns to the market. If sellers get smart and slash their prices 15-20% then inventory will start moving again, and we can get through this much sooner. If you bought at the peak of the boom, then either just keep living in your house or rent it, because you're not going to get that price for your home anytime soon. Nobody should be trying to sell a house right now unless they have absolutely no other choice.