2013 Real Estate Market - Looking Forward

The Real Estate Market is shifting once again.  At the start of 2013, we are moving into really new territory.   Many other pros are a little unsure of where they are going with the 2013 Real Estate Market.  When I say pros, I mean agents, brokers and investors.  A salesperson from one of the major real estate websites called me, asking me to “fill in a great spot” that just opened up in my section of Orange County.  That call led to a very interesting conversation.  Because of that conversation, I decided to write about my observations as a buyer, investor and Realtor©.

It turned out that one of my major competitors and two smaller ones were pulling their ad campaigns from his company’s website.  During the conversation, he made a funny comment.  He said, “It is just like all the agents have decided to roll over and die.  They are all giving up.”  That got me thinking.

He was right in more ways than he realized.  He was also missing the real issue.  It isn’t the agents that have died, it is the market.   Yes many agents are leaving the business, but that isn’t the big issue with todays Real Estate Market.

In the area I focus on, my “farm”, listings are nearly zero.  Three years ago there would have been 20-30 signs at any given time.  Last weekend, there were just four.  Three of these are simply over priced which will require a very willing cash buyer.  I even like one of the homes, but it is priced too high and out of my budget.  Three of these homes also have been on the market over a year, one of them over two years.  The home that has been on the market the longest is held open just about every weekend now.

That house is an odd case.  It really is a great home and it is in a great location.  The problem is that it is a “middle house”.  There are significantly nicer homes and a few “fixers”.  The cash investors are buying the “fixers” and the cash buyers are going for broke.  My guess is they agree with me on inflation.  I think Real Estate is a better hedge against long term inflation than gold.

In a high dollar market like Orange County California, there is another issue.  Lenders aren’t lending the way they used to.  The ratio’s that we as agents learned to use for the past five or ten years are no longer valid.  Higher credit scores are required just as much as lower payment ratio’s.  

Being self employed, my income is avaeraged.  When I bought my home, I had a 52% ratio. That means the day I bought the house, 52% of my take home pay was going to be used for the monthly payment.  While that sounds crazy, it really wasn’t, if I was right. 

The bet I made was that the market prices had bottomed, interest rates were near bottom and I was buying my home below market due to the sellers stress.  So far it looks like I was right or lucky.   I bought into this market with a fixed rate loan, and knew that my wife would be going back to work bringing the 52% closer to 40%.  

Today, that kind of loan isn’t going to happen.  A payment to income ratio with 40% of take home pay for the house payment would be considered quite high now.   A couple of the loan officers I talked to at the big banks are saying they would like to see 30-35% ranges.

If I were house shopping today that means that I wouldn’t be able to buy anything close to what I live in now.  

This is the root of the problem with the Real Estate Market, not the agents.

When you take out “liar loans” and cut the maximum payments, you can see why the average buyer isn’t buying.  You can also see why sellers aren’t selling.  Nobody can move up.  The few people who I am lucky enough to talk with about listing their home are usually moving inland to lower priced property or out of state because of our new taxes.

House prices are creeping upwards here in Orange County, and I believe this is due to simple inflation, not a recovering market.  Days on Market is usually a great indicator to tell the status of the market.  That number is dropping, which in “normal” markets would indicate a move to recovery.  In this case, it is merely a symptom of the shrinking Real Estate Market.

What does it all mean, and when will the market recover?

For buyers, it means you need to be prepared.  You need at least one if not two loans pre-approved before you even start shopping.  Why?  Because when your agent does find you that house, you’ll need to move quickly before the seller changes their mind or gets an offer from someone better prepared to buy.  Sellers that do sell aren’t playing games and have cash offers lining up.

For sellers, it means that you also need to be prepared.  You should clean up the house to get the most you can for it, and be ready to move when a good offer comes in.  You also need to be ready to find out the buyers really can’t buy.  Even two pre-approvals may not get a loan these days.  

Sellers also have the advantage of being able to select from many hungry agents who are getting back to work.   Some are still figuring out the new rules and others are out door knocking for listings.  Either way, sellers need to be careful.  An agent trying to sell a home under last years rules won’t get you the best price or deal you can get.

There are still a few lazy “experts” that live in an area and have a listing or two.  If you do a little homework before listing your home, they are easy to spot.  All you have to do is read their listings and look at the details.  Don’t select an agent because they are your friend or neighbor, select an agent who will work for you.

When other agents are looking at the wrong information on the MLS, your house is going to have a hard time selling.  Recently I previewed a property after receiving several calls about it.  From the MLS data, the home was a deal, and I had a cash buyer who would be very interested.  While doing my research, I found the listing agent listed the monthly land lease of $4,000 as the annual lease.  Even after I pointed out that he had understated the annual lease by $44,000 he left the listing as is.  $44,000 per year is an entirely different category of buyer in this market.

For agents, the 2013 Real Estate Market means you have to go to work.  Not work like 2006 where you could plug a sign in the ground, and write a contract.  Work like really knowing your buyer before ever start shopping for them.  Anyone can surf the internet and find houses.  Our job as agents is to represent the buyers and find them a home, investment and help them fulfill dreams.  Todays challenge isn’t selling a home, it is fighting for the listing.  

Working with buyers is a whole new dynamic of research.  Knowing your area is key, and knowing when to let go of a buyer is also a skill many have forgotten.  When buyers are willing to go anywhere, you can’t help them.  Even thirty year veterans like my mentor can’t know every area in Orange County.  

While all of this is bad news for the local Real Estate Boards, since membership will likely continue to decline for the next two years or so, it is good news for agents willing to work.  Full commissions will be justified as you become the expert helping buyers and sellers navigate the overload of information and correct the misinformation from the internet and the press.

Like all things, the 2013 Real Estate Market will come and go, and next year will be different.  For now, hold on, it is going to be a rough ride.

Authors Note: Scott Bourquin is a Real Estate Agent and investor with Keller Wiliams Realty in Newport Beach California representing the Orange County Coast.  Not all areas will experience the same Real Estate Market.