The Plot Thickens

I recently returned from teaching a course in market analysis and highest and best use to a group of 45 young business professionals. These days as an instructor and presenter it is of foremost importance to determine the relative experience in years of the group or participants in the conversation. It turns out that less than 15% or only 6 people out of 45 had been in the real estate business more than three years! This means that these appraisers and consultants have never seen a market downturn and have only the viewed the world of real estate with a strained neck looking up as prices rise. The task of de-programming the group is no different than also understanding the buyer-seller psychology of a boom market. No one wants to let go of the notion that the market will continue upward, "maybe slower" but still up! This is a classic case of staged denial; first it is disbelief that something that has basically lasted for 5-years could be over. Second, where we are now, explores and embraces the myth that the market just has a "little cold" right now but it is not really sick! Subsequent stages will be more realistic as inventories continue to rise and ultimately prices fall, likely to levels below recent sales prices and who really knows how far?

It's classic economics, prices reached such a level because of the convergence of a number of forces, "the perfect storm" as I like to call it. Through the melting together of cheap and abundant financing, "post 9-11 hopefulness", fallout in other investment markets, post election tax breaks, a wartime economy and the ever present cloud of "boomers" all the elements for a sustained five year bull market just fell into place. Demand has been overheated by the presence of a here-to-fore limited segment turned stronger, investors, not the "pros", but people just like you and me, new real estate millionaires. Everyone wanted to get in on it and yesterdays "dog" properties became pseudo purebreds.

So prices escalate without abatement, and as surely as night follows day, supply struggles to catch up with demand. When that happens, and based on current statistics it surely has, then prices have immense pressure to change in order to absorb supply. And so it has always been, sometimes for shorter periods of boom times but always with a dip in the market.

The real question we continue to explore here in subsequent postings is how big a dip is it, how long will it last and what can you do?

Stay tuned!