Should you buy a home now if you need one?
Remember the Beanie Babies?
Back about 10 years ago when my son was in elementary school, all the kids (and their moms) were crazy about Beanie Babies, the bean-bag toys from Ty. We were all so crazy about collecting them that we stopped seeing them as toys and started seeing them as investments. I remember one mom telling me that her daughter had an original Beanie Baby – I think it was a dark blue elephant, but maybe it was an octopus – that was worth $1,400.
Eventually, the Beanie Baby market crashed, just as the Dutch tulip market crashed hundreds of years ago and the housing market crashed recently. Every market that escalates dramatically because demand outstrips production will crash when the demand falls off or when a new and cheeper way is found to produce the product.
So what’s my point?
Stop seeing your home as primarily an investment. It’s your home. It’s the place that sets the tone and style for your life. It’s a statement about you. And oh yes, maybe when you sell it, you will make some money. But stop making that the sole factor in deciding when you’ll buy a home. If you need a home this year, buy one. It’s much better for your tax returns than renting. There are so many desperate sellers out there that you will probably find an excellent price on a home you really like. And if you have good credit, you will probably not have trouble getting a mortgage.
In fact, most banks are very eager to lend you money if you have good credit. They want a larger downpayment now than they did before the subprime meltdown, and you won’t be able to find a mortgage with no money down. But if you can make a downpayment, go out and get that house now. And enjoy it.
Will the market dip a bit more before it recovers? That may depend on the town where you decide to live. But most economists are projecting a recovery sometime next year. So think about it. Are you planning to sell six months from now? Then maybe you should get a short-term rental instead of buying. But if you’re looking to put down some roots and start a family, or if you’re thinking about trading up or downsizing — and the bank says you can afford it — go ahead.
The more people who make this decision, the more stable the real-estate market will get. And eventually, we’ll see modest, sustainable appreciation again. In some towns, we’re already seeing it. This is a great time to buy.
Wednesday, October 31, 2007
Tuesday, October 30, 2007
A correction
Someone recently pointed out that it takes 75 hours of classroom time, not 175, to complete the pre-licensing course for a real-estate salesman license in New Jersey. Maybe it just seemed like 175 when I took the course back in the 70s. I apologize for my mistake.
Demographics: the hidden force in real estate
A few years ago, I attended a conference in Trenton sponsored by the NJ Department of Labor about how aging baby boomers are influencing our state’s economy. As a real-estate editor, I was struck most by the work of Dr. James Huges, dean of the Bloustien School of Planning and Public Policy at Rutgers.
He and his colleagues had studied the real estate boom (this was in 2003) and concluded that we were not yet in a bursting bubble, but that things would take a downturn if we had appreciation of more than 11 percent for more than five years. He also came up with a stark reality that I had never considered before. The size of generation X, the first wave of the baby boomer’s children, is just a little more than half the size of the boomer generation. So as the boomers turn 65 and start downsizing their homes out of economic necessity, we are going to find that there are fewer buyers for the homes that the boomers are selling.
More recently, I discussed this phenomenon with Jeffrey Otteau, the East Brunswick-based appraiser and guru of market statistics who tracks prices in every New Jersey town in detail. He believes that when the first boomes turn 65 in a couple of years, we will see a dramatic effect: who is going to buy the McMansions when the boomers start selling them off?
To be sure, builders are already shifting many of their resources away from McMansions to build active-adult communities, just to address this phenomenon. But that’s not enough. If you look at the homes constructed in the 1990s and 2000s, the majority of them are large homes on fairly large lots that burn a lot of energy and may be unsustainable in the future. Oh, there will probably be buyers for some of them, but they will sit longer on the market and not appreciate as quickly, or perhaps they will depreciate more rapidly, after that 2009 to 2011 threshold when the boomers begin downsizing in earnest.
And yet, when I go to real-estate conferences, and I usually attend two or three each year, very few economists or professional real-estate brokers will even look at this phenomenon as they project market forces. In fact, the downsizing has already begun for some boomers, and nobody looks at this as a serious market force.
I don’t like to be a harbinger of doom and gloom. But I think buying or building an extravagant home in New Jersey will increasingly be a lifestyle statement, not an investment in the future. Think about it.
He and his colleagues had studied the real estate boom (this was in 2003) and concluded that we were not yet in a bursting bubble, but that things would take a downturn if we had appreciation of more than 11 percent for more than five years. He also came up with a stark reality that I had never considered before. The size of generation X, the first wave of the baby boomer’s children, is just a little more than half the size of the boomer generation. So as the boomers turn 65 and start downsizing their homes out of economic necessity, we are going to find that there are fewer buyers for the homes that the boomers are selling.
More recently, I discussed this phenomenon with Jeffrey Otteau, the East Brunswick-based appraiser and guru of market statistics who tracks prices in every New Jersey town in detail. He believes that when the first boomes turn 65 in a couple of years, we will see a dramatic effect: who is going to buy the McMansions when the boomers start selling them off?
To be sure, builders are already shifting many of their resources away from McMansions to build active-adult communities, just to address this phenomenon. But that’s not enough. If you look at the homes constructed in the 1990s and 2000s, the majority of them are large homes on fairly large lots that burn a lot of energy and may be unsustainable in the future. Oh, there will probably be buyers for some of them, but they will sit longer on the market and not appreciate as quickly, or perhaps they will depreciate more rapidly, after that 2009 to 2011 threshold when the boomers begin downsizing in earnest.
And yet, when I go to real-estate conferences, and I usually attend two or three each year, very few economists or professional real-estate brokers will even look at this phenomenon as they project market forces. In fact, the downsizing has already begun for some boomers, and nobody looks at this as a serious market force.
I don’t like to be a harbinger of doom and gloom. But I think buying or building an extravagant home in New Jersey will increasingly be a lifestyle statement, not an investment in the future. Think about it.
Monday, October 15, 2007
Is the DoJ out to get NJ Realtors?
Last week, the Department of Justice's anti-trust division launced a new Web site, http://www.usdoj.gov/atr/public/real_estate/index.htm.
The purpose of this site, according to the Department of Justice, is to encourage more competition in the real-estate marketplace, thus creating market forces that will lower commissions and help consumers.
In theory, I suppose this sounds good. When you look at all the pressures on real-estate companies that have come since the maturing of the Internet, though, I have to wonder if this is really what will happen. Numerous referral systems, the costs of developing ever-more-sophisticated Web sites, expensive training, giving agents a bigger share of the commission, the growing cost of omissions-and-errors insurance and many other other costs and pressures have taken a lot of profit out of the real estate buisiness for the broker-owners. When market forces force people to work on ever narrower margins, what usually happens is that the big guys find a way to survive and the little guys don't. The little guys sell out to bigger companies or they quietly go away. And what does that do to competition?
The thing that disturbs me most about this federal push to break Realtors, though, is that they want to open the business of representing sellers to any cowboy or yokel who can create a Web site or a referral system, regardless of their ethics.
Long ago, New Jersey created a Real Estate Commission.The Real Estate Commission requires anyone in this state who represents homesellers or homebuyers to have a real estate license, and in order to take the test to get the license, you need to take 175 hours of instruction about real estate law. I took the class back in the 1970s after the licensing course, which I think in those days may have been about 150 hours (any of you old-timers in the business are welcome to jump in with a comment and correct me). It wasn't necessarily the best preparation for how to negotiate a sale, but it did cover a lot of basic law and math. We learned how to calculate acreage and sales commissions, and we learned about fair housing law. I have to say, I think that licensing has been a good thing. It's not a fool-proof protection for consumers, but it certainly helps.
Well, the all-knowing federal government, in the form of the Department of Justice and the Federal Trade Commission, is taking a different view. In a FTC memorandum earlier this year and this new DOJ Web site now, the federal government seems to think that the Realtors are restricting trade, with the help of their state Real Estate Commissions. The idea of protecting consumers from unscrupulous, ignorant people isn't that important anymore. The size of the commissions is.
I got an e-mail this morning from a disgruntled Foxtons client in Staten Island. She's upset because Foxtons refuses to release her from her listing contract, but whenever she calls them about the sale of her house, they are not available. Nobody answers her calls, nobody has helped her negotiate. Some other Realtor came up with an offer on her house and negotiated it without Foxtons' help or participation. She has no intention of paying Foxtons any commission and considers them in breach of contract.
Yes, Foxtons is a licensed company that should be bound by the real-estate commissions in the states where it operates, and in this case, the licensing process didn't protect this woman in Staten Island. But, I continue to maintain that Foxtons had an unrealistic business model, one that never made enough from each sale to remain profitable. Foxtons never bought the idea that people need good service -- maybe some of its agents did, but the company's overall record of customer service was abysmal. It seems to me that if the FTC and DoJ have their way and we get a lot more discounters in the market place, we're going to see a lot more of this kind of discomfort from people who work with unlicensed cowboys who are in the business for a quick profit, poor service and worse results.
But I digress. The DoJ names 12 states that are particularly egregious for not allowing rebates on commissions. New Jersey is one of them.
Now I ask you, what is the point of this? Can anybody negotiate the size of a sales commission in New Jersey? Of course they can. In fact, every real-estate agent is required to say that every sales commission is negotiable.
What's the difference between an agent saying "I'll sell your house for a 5-percent commission" or an agent saying "I'll sell your home for a 6-percent commission, but I'll give you a 1-percent rebate at the closing?"
The difference is, the straight 5-percent commission is easier to understand. And with the rebate, you have to ask the guy to clarify if he's giving you back a 1-percent of the selling price or a 1-percent of the commission, which would actually leave you paying more than 5 percent.
This whole idea of removing the controls created by the state real-estate commissions and opening the market up to anybody without a license smacks to me of the same idea of de-regulating the savings-and-loan associations. Remember where that got us?
What's your opinion?
The purpose of this site, according to the Department of Justice, is to encourage more competition in the real-estate marketplace, thus creating market forces that will lower commissions and help consumers.
In theory, I suppose this sounds good. When you look at all the pressures on real-estate companies that have come since the maturing of the Internet, though, I have to wonder if this is really what will happen. Numerous referral systems, the costs of developing ever-more-sophisticated Web sites, expensive training, giving agents a bigger share of the commission, the growing cost of omissions-and-errors insurance and many other other costs and pressures have taken a lot of profit out of the real estate buisiness for the broker-owners. When market forces force people to work on ever narrower margins, what usually happens is that the big guys find a way to survive and the little guys don't. The little guys sell out to bigger companies or they quietly go away. And what does that do to competition?
The thing that disturbs me most about this federal push to break Realtors, though, is that they want to open the business of representing sellers to any cowboy or yokel who can create a Web site or a referral system, regardless of their ethics.
Long ago, New Jersey created a Real Estate Commission.The Real Estate Commission requires anyone in this state who represents homesellers or homebuyers to have a real estate license, and in order to take the test to get the license, you need to take 175 hours of instruction about real estate law. I took the class back in the 1970s after the licensing course, which I think in those days may have been about 150 hours (any of you old-timers in the business are welcome to jump in with a comment and correct me). It wasn't necessarily the best preparation for how to negotiate a sale, but it did cover a lot of basic law and math. We learned how to calculate acreage and sales commissions, and we learned about fair housing law. I have to say, I think that licensing has been a good thing. It's not a fool-proof protection for consumers, but it certainly helps.
Well, the all-knowing federal government, in the form of the Department of Justice and the Federal Trade Commission, is taking a different view. In a FTC memorandum earlier this year and this new DOJ Web site now, the federal government seems to think that the Realtors are restricting trade, with the help of their state Real Estate Commissions. The idea of protecting consumers from unscrupulous, ignorant people isn't that important anymore. The size of the commissions is.
I got an e-mail this morning from a disgruntled Foxtons client in Staten Island. She's upset because Foxtons refuses to release her from her listing contract, but whenever she calls them about the sale of her house, they are not available. Nobody answers her calls, nobody has helped her negotiate. Some other Realtor came up with an offer on her house and negotiated it without Foxtons' help or participation. She has no intention of paying Foxtons any commission and considers them in breach of contract.
Yes, Foxtons is a licensed company that should be bound by the real-estate commissions in the states where it operates, and in this case, the licensing process didn't protect this woman in Staten Island. But, I continue to maintain that Foxtons had an unrealistic business model, one that never made enough from each sale to remain profitable. Foxtons never bought the idea that people need good service -- maybe some of its agents did, but the company's overall record of customer service was abysmal. It seems to me that if the FTC and DoJ have their way and we get a lot more discounters in the market place, we're going to see a lot more of this kind of discomfort from people who work with unlicensed cowboys who are in the business for a quick profit, poor service and worse results.
But I digress. The DoJ names 12 states that are particularly egregious for not allowing rebates on commissions. New Jersey is one of them.
Now I ask you, what is the point of this? Can anybody negotiate the size of a sales commission in New Jersey? Of course they can. In fact, every real-estate agent is required to say that every sales commission is negotiable.
What's the difference between an agent saying "I'll sell your house for a 5-percent commission" or an agent saying "I'll sell your home for a 6-percent commission, but I'll give you a 1-percent rebate at the closing?"
The difference is, the straight 5-percent commission is easier to understand. And with the rebate, you have to ask the guy to clarify if he's giving you back a 1-percent of the selling price or a 1-percent of the commission, which would actually leave you paying more than 5 percent.
This whole idea of removing the controls created by the state real-estate commissions and opening the market up to anybody without a license smacks to me of the same idea of de-regulating the savings-and-loan associations. Remember where that got us?
What's your opinion?
Wednesday, October 3, 2007
Why discount commissions can hurt you
When you hire a real estate agent, the law says you are free to negotiate the commission. There are some very fine agents out there who routinely work for less than 5 or 6 percent of the sellling price. But if you engage such an agent, there are some things you should keep in mind.
First, when you engage someone for a lower fee, you may not have the right to expect the same amount of service you would get from someone who wanted a higher fee. For example, I knew a RE/MAX agent in Morris County who used to routinely take listings at 4 1/2 percent commisisons. And based on the amount she would make on each sale, she calculated how much she could afford to spend advertising that house. I distinctly remember her telling me that one of her clients had reached her budget limit, but that client was still expecting the home to be advertised aggressively. It wasn't going to happen.
If you are expecting an agent to advertise your home a lot, don't expect a broker or an agent to be willing to do that for a reduced commission.
Likewise, if you want a listing agent with great capabilities on the Web, including virtual tours and the ability to tell you how many times people looked at your home on his or her Web site, don't be surprised if you won't get those services from a discount broker.
Last week, Foxtons declared bankruptcy. Why did that happen? Because their business model was flawed. They thought they could make their money on volume sales, and originally, they wouldn't even cooperate with other brokers on their 2-percent commission listings. Yes, they put every listing on the Web and gave it a virtual tour, but that wasn't enough to sell every house. But Foxtons -- it was called YHD or Your Home Direct in those days -- couldn't make a profit collecing only 2-percent commissions on each sale unless they didn't have to share that commission with another broker.
Then, when that model didn't work well enough, I believe YHD had to get an investor. Foxtons -- a British real-estate firm -- came in, ostensibly to give YHD the money to expand to other states. A lot of industry leaders I know were skeptical that YHD was making enough money to not need that infusion of capital here in NJ for its original offices, but that has never been proven. What I can say is that after Foxtons came in, the 2-percent commission finally disappeared and eventually even the YHD name disappeared. Foxtons took over, modified the business model somewhat and tried to make a go of it at 4-percent commissions.
Do a Google search of Foxtons, as I did last week, and you will read postings from hundreds of people who regretted listing their home with Foxtons because of the terrible service they got.
When Foxtons declared bankruptcy, we got an e-mail from another discount broker, Thomas Fisher, of HouseEpress.com in Bridgewater. I think what he has to say is worth quoting in full:
"The current downturn in the real estate market was only half the story concerning the recent demise of Foxtons real estate.
"Foxtons business model of discount commissions charged to home sellers is viable. Our own discount business has been in existence since 1998 and continues to be profitable.
"Foxtons' failure is due to their bombastic and competitive relationship with competing real estate firms. Their advertisements mocking the higher fees charged by other brokers won them no friends. In essence, the residential real estate community wanted to see them fail.
"Secondly they ostracized themselves further by cutting the amount of commission paid to the selling broker from 3% or 2.5% to 1%. In essence Foxtons did not want to share their listings with other brokers as they wanted to sell the house themselves in order to keep the entire 3% they were charging the homeowner. This hurt their sellers' chances of receiving offers from buyers working with other brokers. Clearly Foxtons wasn’t looking out after the interests of their own clients."
Which brings me to my last point for today. The most powerful tool for selling a home is the Realtors' Multiple Listing Service. This is a database of all the homes listed by brokers in a given area, and the brokers and their agents agree to show each others listings. This is a win-win situation for everyone: the sellers get the best exposure, the buyers get the best possible selection and the agents get a large inventory of homes to show. As long as the brokers cooperate with each other, it works pretty well. But when brokers like Foxtons think that they can treat other brokers unfairly, it doesn't work to anybody's advantage.
At the opposite end of the scale is a broker like Rick Weidel (Weidel Real Estate). A few years ago, he took a look at the trend for brokers to reduce their commissions, and he came to a different conclusion than most: he decided that to compete effectively, he should insist that his agents take 6-percent commissions on all listings. He reasoned that the best way to motivate his own agents and agents in other companies to sell Weidel listings was to offer a 3-percent selling commission (the listing broker gets 3-percent and the selling broker gets 3-percent). His motto is "Everyone loves to sell Weidel," because everybody likes to make the big commission. His program has been successful enough that he's been asked to show other brokers around the country how his company does it.
As I said, there are many fine brokers and agents who will often work for a lower commission. And if you engage one of them to sell your home, you may be very satisfied with their service. But before you engage them, make sure they will provide you with the level of service you want and deserve.
First, when you engage someone for a lower fee, you may not have the right to expect the same amount of service you would get from someone who wanted a higher fee. For example, I knew a RE/MAX agent in Morris County who used to routinely take listings at 4 1/2 percent commisisons. And based on the amount she would make on each sale, she calculated how much she could afford to spend advertising that house. I distinctly remember her telling me that one of her clients had reached her budget limit, but that client was still expecting the home to be advertised aggressively. It wasn't going to happen.
If you are expecting an agent to advertise your home a lot, don't expect a broker or an agent to be willing to do that for a reduced commission.
Likewise, if you want a listing agent with great capabilities on the Web, including virtual tours and the ability to tell you how many times people looked at your home on his or her Web site, don't be surprised if you won't get those services from a discount broker.
Last week, Foxtons declared bankruptcy. Why did that happen? Because their business model was flawed. They thought they could make their money on volume sales, and originally, they wouldn't even cooperate with other brokers on their 2-percent commission listings. Yes, they put every listing on the Web and gave it a virtual tour, but that wasn't enough to sell every house. But Foxtons -- it was called YHD or Your Home Direct in those days -- couldn't make a profit collecing only 2-percent commissions on each sale unless they didn't have to share that commission with another broker.
Then, when that model didn't work well enough, I believe YHD had to get an investor. Foxtons -- a British real-estate firm -- came in, ostensibly to give YHD the money to expand to other states. A lot of industry leaders I know were skeptical that YHD was making enough money to not need that infusion of capital here in NJ for its original offices, but that has never been proven. What I can say is that after Foxtons came in, the 2-percent commission finally disappeared and eventually even the YHD name disappeared. Foxtons took over, modified the business model somewhat and tried to make a go of it at 4-percent commissions.
Do a Google search of Foxtons, as I did last week, and you will read postings from hundreds of people who regretted listing their home with Foxtons because of the terrible service they got.
When Foxtons declared bankruptcy, we got an e-mail from another discount broker, Thomas Fisher, of HouseEpress.com in Bridgewater. I think what he has to say is worth quoting in full:
"The current downturn in the real estate market was only half the story concerning the recent demise of Foxtons real estate.
"Foxtons business model of discount commissions charged to home sellers is viable. Our own discount business has been in existence since 1998 and continues to be profitable.
"Foxtons' failure is due to their bombastic and competitive relationship with competing real estate firms. Their advertisements mocking the higher fees charged by other brokers won them no friends. In essence, the residential real estate community wanted to see them fail.
"Secondly they ostracized themselves further by cutting the amount of commission paid to the selling broker from 3% or 2.5% to 1%. In essence Foxtons did not want to share their listings with other brokers as they wanted to sell the house themselves in order to keep the entire 3% they were charging the homeowner. This hurt their sellers' chances of receiving offers from buyers working with other brokers. Clearly Foxtons wasn’t looking out after the interests of their own clients."
Which brings me to my last point for today. The most powerful tool for selling a home is the Realtors' Multiple Listing Service. This is a database of all the homes listed by brokers in a given area, and the brokers and their agents agree to show each others listings. This is a win-win situation for everyone: the sellers get the best exposure, the buyers get the best possible selection and the agents get a large inventory of homes to show. As long as the brokers cooperate with each other, it works pretty well. But when brokers like Foxtons think that they can treat other brokers unfairly, it doesn't work to anybody's advantage.
At the opposite end of the scale is a broker like Rick Weidel (Weidel Real Estate). A few years ago, he took a look at the trend for brokers to reduce their commissions, and he came to a different conclusion than most: he decided that to compete effectively, he should insist that his agents take 6-percent commissions on all listings. He reasoned that the best way to motivate his own agents and agents in other companies to sell Weidel listings was to offer a 3-percent selling commission (the listing broker gets 3-percent and the selling broker gets 3-percent). His motto is "Everyone loves to sell Weidel," because everybody likes to make the big commission. His program has been successful enough that he's been asked to show other brokers around the country how his company does it.
As I said, there are many fine brokers and agents who will often work for a lower commission. And if you engage one of them to sell your home, you may be very satisfied with their service. But before you engage them, make sure they will provide you with the level of service you want and deserve.
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