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Saturday, August 27, 2011 9:35 PM


Five Rules to Remember When Dealing with Real Estate Agents; Why are New Home Sales So Low? How Big is the Pool of Eligible Home Buyers?


A reader asked me to comment on historically low mortgage rates and their effect on housing. He asked because Realtors are telling him mortgage rates prove now is a "great time to buy".

That comment prompted me to write Five Rules to Remember When Dealing with Real Estate Agents

Rule Number One

Real estate agents will always say "Now is a Great Time to Buy" no matter what the trend of prices, mortgage rates, or inventory.

Here are some phrases to expect depending on current conditions.

  1. Prices are going up, better act fast.
  2. Alternatively, prices are falling, homes won't last long at these prices.

  1. Interest rates are going up, better buy quick before you get priced out.
  2. Alternatively, mortgage rates are falling, they won't go much lower.

  1. Inventory is huge. It's a buyers' market.
  2. Alternatively, Inventory is shrinking fast. Don't let your dream home pass you by.


Rule Number Two

Unless you specifically have a buyers' agent negotiating on your behalf, the agent represents the seller.

Rule Number Three

The agent has only two missions:
  • To get you to buy something
  • To get you to pay as much as possible so the agent make the largest commission possible

Rule Number Four

As a result of rules one, two, and three, it is imperative to be skeptical about anything positive your agent says.

Rule Number Five

It's equally important, if not more important, to take cues from what the agent does not say. For example, if the agent does not say anything about the school district, it is probably a poorly rated school district. Also, don't expect the agent to tell you if a crack house is next door, gangs have taken over a neighboring block, the tap water tastes like sulfur, or the street floods every April. At most, agents will only disclose what the law says they must.

How Big is the Pool of Eligible Home Buyers?

Here is a set of questions that will explain what is happening now.

How many people ....
  1. Don't have a house?
  2. Want a house?
  3. Can afford a house, upkeep, and property taxes?
  4. Have a needed cash cushion in the bank?
  5. Have a decent down payment for a house?
  6. Have a salary that can support interest and principal payments even at these low rates?
  7. Are not scared s*less about the loss of a job, assuming they do want a house and meet the rest of the conditions?
Someone needs to meet all of those conditions before they will buy a new house. How many is that?

I just happen to have the answer.

New Home Sales at 1963 Levels

The Los Angeles Times reports New home sales drop to six-month low
Sales of newly built homes fell in July to the lowest level in six months, as the nation's housing market continues to struggle.

Newly constructed single-family homes sold at a seasonally adjusted annual rate of 298,000, putting the industry on a pace to post the lowest annual sales since the Commerce Department began keeping data in 1963.
Is the eligible buyers' pool getting bigger or smaller?

The trend says smaller, in spite of falling interest rates and falling prices. Many items on my 7 point list are more important than interest rates, notably 1, 2, 3, 5, and 7.

That is the psychology of the situation and I see little reason for it to change until the labor market changes first.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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