My Theory on The “Bottom” of the Market

On March 18, 2012, in Uncategorized, by David Monsour

A theory and purely conjecture but backed up by experience and coming from a real estate professional I hope this will enlighten consumers.  I’ll start with a small example and then expand on my so called theory of the bottom.  Last week I sat down with a builder and a land owner to try to navigate the market and create a win win for me (real estate agent), the land owner, and the builder.  We began evaluating the costs of construction, real estate fees, and the land cost with an attempt to end up with profit, after all without profit the whole project would be essentially pointless.  It would be like working but never getting a paycheck. So we came to the conclusion that marketing a house, finding a buyer, and coming full circle with the process would be no problem at all, however making money could be a problem.

Okay so that is my example, perhaps unnecessary but the long and the short of it is that it’s difficult to build a home in today’s real estate market.  Home values are too low, materials are expensive, and a quality finished project requires a skilled craftsman.  Okay fine it’s not hard to build the home because there are many builders that aren’t as busy as they’d like, what is challenging is financing the home.  If the bank can’t appraise the home at the right value they will never give you the money to build it.

Supply vs. Demand is a simple economic principal which we probably over use but it has it’s applicable here.  I do believe that the bottom of the market will truly happen when new homes become impossible to build because of financing.  Existing home values are still falling and are quickly approaching the point where a new home build that is financed will be quite challenging unless land cost is very low.  When we hit this point we will eventually fall into a supply issue because construction will greatly slow.  I don’t think this will happen in all markets but I can see the writing on the wall in some areas.

To be clear there are many more issues affecting the real estate market.  Millions of people have wounded credit from foreclosure or short sale taking a good 20-25% of buyers out of the market in the short term.  The rough economy has probably put more than the average amount of consumers into bankruptcy which means years of bad credit.  High unemployment, consumer confidence, and the fear of potential job loss is further exacerbating the problem.  I want the market to recover more than anyone but there is a lot of downward pressure on real estate.

On and up side there will probably never be a more affordable time to buy a home during my lifetime and I firmly believe that.

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