Are you familiar with the term “the chattering classes”? Briefly, they are the TV talking heads, print pundits and local community activists who know how to run your life better than you do yourself.
They’re from all points on the political spectrum, and declaim on every matter of interest to modern humankind. They will tell you how to vote, whose movie to go to, what cause to support, which stock to invest in and when, where and why to buy a house. The nice thing, too, is that you can shop around until you get an opinion that you agree with. Some chatterer somewhere will co-sign the idea you already had, allowing you to proceed with authority.
Contradictions peacefully coexist among the chatterers, because, well, everything is everything, right? My truth is my truth, yours is yours. Right? That must be right, since on the one hand, lots of chatterers are saying that the current financial crisis makes this a great time to buy real estate, while others say just the opposite and advise a wait-and-see approach.
It’s almost like a contest of battling cliches. In this corner, “The credit crisis changes everything, just like 9/11 did.” And in this corner, “There’s nothing new under the sun.”
Okay. Simple question: What the heck is going on with real estate?
Here, there, everywhere There are some regional differences but, generally speaking, real estate in the U.S. has been on a slide. In late October 2008, Standard & Poor’s Case-Shiller Home Price Index of 20 cities reported its comparison of August 2007 with August 2008. The Index showed the biggest annual drop in history, almost 17 percent. Only two cities in the survey, Boston and Cleveland, held steady, while Los Angeles, San Francisco and San Diego all dropped a full 25 percent. In Phoenix and Las Vegas, the loss in value was a staggering 31 percent.
Does this mean it’s a “buyer’s market,” and that everyone who can should run out and buy a house? Of course not. That’s never a good piece of advice anyway, since it is not individualized. Beyond that, the best of the best of the financial analysts tell us the bottom is still 24 to 30 months away. How do they know this?
A long-term thing There are a lot of things that go into a modern economy, far too many for one person to keep track of. And the things that need to be perking along in the economic pipeline to support growth in the “housing sector” are numerous, often mysterious and subject to constant fluctuation. But by looking at hard goods, tool and die orders, the building materials manufacturers, credit availability, employment figures, mobility patterns and dozens of other “indicators,” the smarter fellows among the market and financial analysts can make some pretty accurate predictions about home construction, sales and resales.
Bert Dohmen pens the biweekly Wellington Letter and other investor advisories, and is one of the very few “smart money” men (or women) who can show articles from 12-18 months ago predicting a “credit crisis” and “financial meltdown.” Dohmen’s book, Prelude to Meltdown, was written at the end of 2007 and released in January, and by that time he had already made it clear that credit was the big bubble getting ready to burst. One of the industries that Dohmen keeps a microscope on is home construction. It is literally the architect and contractor of the American Dream.
R. H. Johnson, a financial planner who passed away in 2006, was well known for being a big, friendly “bear” of a man. He was also a market bear more often than not, like Dohmen today. He was predicting, as far back as 2004, the popping of the credit and real estate bubble, a condition he saw as being that of parasite and host, respectively. The valuations were too high, he argued, and were driven by “non-rational factors,” among which was the relatively new trend of viewing real estate as a wealth-creation, rather than wealth-storing, vehicle.
Johnson saw the beginnings of the “reality TV economy,” where shows like Flip This House and others touted buying/fixing/selling as a way to play Monopoly with real money and build a real estate empire. In Johnson’s adult life – he graduated from college as an engineer in 1944 and switched to financial planning in 1970 – he was used to looking at real estate as something you held on to, for the most part. It was a long-term thing.
Old meets new The next two years offer great opportunities for people to get into real estate at true market valuation, not the American version of the Dutch Tulipmania of 1636-37. (Look that one up if it’s new to you. Unbelievable.) Dohmen says it’s not the bottom yet, which the next few months will confirm, he expects. That said, there is certainly no reason first-time buyers should not start preparing themselves for home shopping.
Just this week, in Yuba City, California, half an hour north of Sacramento as the freeway flies, a four-bedroom house with a separate in-law studio in the back yard sold for just over $100,000. It was listed in March 2007 at $189,000. Dohmen suspects it will dip even lower (perhaps not in assessed value, but in actual resale worth) before it starts appreciating again in 2011 or so.
The new owner, Sherry Hutchins, is a single woman about 50, with a credit score of 750 (very good). She put zero down, paid no closing costs and will have a monthly payment of around $700 and change. She can get $300+ per month from renting the back studio, so her net mortgage payment for her new home is going to be about $400 a month. She currently pays over $800 for rent on a much smaller duplex, with fussy neighbors, to boot. She put together a great deal for herself, cutting her “rent” in half, achieving freedom from troublesome neighbors and securing herself for the future, too. Triple play!
Hutchins’ plan is to move up in five years, which is sensible. She will be putting sweat equity into the home even before the general market upswing helps raise its value, and paying a little extra on the principle each month. Her good friends, Michelle and Matt, are both do-it-yourselfers, and Matt can do carpentry, plumbing, painting, electrical and most anything else. Since the house is a bit of a fixer-upper, Hutchins plans to strip some rooms down enough to add some built-in shelves, French doors and a state-of-the-art video security system.
“As long as I’m working on the place,” she says, “I figured I might as well build in the small fixtures for the surveillance cameras, which are about as big as a soda can. The wiring can all be out of sight since we’re getting down to the framing in a few spots.” Right now she likes the idea of controlling the video surveillance from her computer, which is easy to learn and allows her to log on from anywhere in the world and take a look around her property. Before she makes a final decision, though, she is “going to see a demo of this self-contained system” that uses a DVR (digital video recorder), just so she can say she did her “due diligence diligently.”
Persistence is key The nation has weathered tough economic times in the past, and will do so in the future, too. Government cannot prevent it, nor counteract it, nor “pay” for it. The future, as always, is in the hands of the 300+ million Americans who will get jobs and lose them, buy homes and sell them, make loans and collect them, invent things and build them, and do all the other billions of things each year that, collectively, add up to “what’s happening in America.” What they do with real estate in the next few years, frankly, will determine “what’s happening” for at least a generation, perhaps two.
The best bet is – drum roll, please – history. As Mark Twain is alleged to have said, “History might not repeat itself, but it does rhyme.” Principles don’t age, anyway, so the notion that some “new” forces would be at work in propelling you through life, instead of the usual hard work and persistence, is downright silly. The same good, solid, sensible habits that built the modern (Western) world over the last few millennia will get you into a new home, too.
And these are not “optional” moves, either. Unless you inherit a lot of money, you will have to work and save, then work and save some more. You will have to shop around, make bids, negotiate with lenders, find the right property finally and then tie it all together. And then you will have to pay for it. There is just no other choice. This is the way you have to do it.
Now, of course, the other part, the computerized video security installation – that decision is yours to make. See? Apparently you do have some options after all. (But video surveillance is a good idea, so think it over.)
By Scott McQuarrie, representing the EZWatch Pro brand, a leading provider of computer based Security Camera Systems for business, commercial and government applications.