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There is always a bottom to every market and recent statistics existing home sales make us wonder how much lower can home sales actually go. In July, existing home sales plunged 27% from June to a 15 year low. Some of that was to be expected with the government home buyer programs ending. But the magnitude of the drop makes you wonder, when will this real estate market hit bottom? Is now a great time to buy, or is that still years away?
With real estate, you don’t get panic selling like you do with securities. What you’re more likely to see at a bottom is a buyer’s strike. July's numbers are indicative that buyers have decided to stay on the sidelines eventhough prices have dropped. And its no wonder, most Americans especially our younger generation has little job security and without security few are going to plunk down even 5% to buy a home.
What these recent stats tell us is that people are bone scared of touching real estate. There is real fear out there and it’s not just the fear of paying too much for a house, it’s the fear of losing a job and the paycheck that covers the mortgage payment and taxes and all the other carrying costs that come with the luxury of owning your own home. Given the state of the economy, some of those fears are rational and should be taken into account in any decision of whether a consumer should take the plunge into real estate.
Of course, if you’re well situated in your job, this might be a good time to cross the strike line because there are some exceptional deals out there – especially on foreclosures and short sales.
When you consider all the incentives that a buyer has today, you end up with a picture of exactly how terrified people are of dipping their toes in the housing market. There is a lingering hangover from the general dismal state of the economy. And it doesn’t help that millions of good decent people were burned in the housing bubble when they swallowed whole the industry’s reckless motto - that housing always goes up and anytime is a good time to buy. Well, the flip side of that creed is the notion that housing prices can only go down and there’s never a good time to buy.
If there is one mistake people make in assessing markets it is that things are linear. If house prices went up yesterday and the day before, they’ll go up tomorrow. The same mentality holds true for other classes of assets including precious metals and stocks. It’s just the nature of the beast and it makes for irrational bubbles and equally irrational bottoms. That’s why a lot of today’s reports say that economists were surprised by the figures. The practitioners of the dismal science were also surprised by the housing bubble because all their models depend on rational decision making and consumers simply aren’t that rational. Apparently they didn't factor in that the acceleration of sales from the government incentives would eventually stop.