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2008-12-23 23:35:52

The Car-Lot Syndrome in Real Estate

When you drive your brand new car out of the dealer’s lot (during normal times) you know that you have automatically lost between 10 and 20 percent of its selling-to-you value. Yet, most people continue to make their payments on their new vehicle for as long as six years even though they are “under water” with their loan on their new car. They don’t turn in their keys and walk away.

The main reason for this phenomenom is that in ordinary times, they are churning out new cars daily making sure the supply-demand principle holds up and almost any car will have a lesser value than what it sold for new.

Then what makes people think houses are any different . . . now in this economy? The supply of houses has been warped by the over-stocked inventories owned by lenders across this nation of ours. To further warp the demand for houses, lenders are being very choosy as to whom they select as borrowers to buy those houses.

We now have the car-lot syndrome in real estate. As soon as we close escrow — in effect driving it out of the lot — we can expect the value of our new residence to have lost value. There is a lot smaller demand for houses the way we became used to in normal supply-demand times. Homebuilders became spoiled when a whole variety of loans made it easy for almost anybody to buy their ever-larger-square-foot products. So they built some more of those homes, thus skewering the supply-demand theory in housing.

There is an exception in the value of cars. When time has passed and older cars have been preserved and maintained, they become known as antiques or classics, their values—guess what—move up! There is more of a demand for them than there is a supply. Therefore the value rises.

The same will happen to homes as well. That is, if today’s frustrated sellers hold on to their properties. As long as REOs flood the banks’ inventories, prices will sink. The frustrated sellers will continue to be frustrated. Only the homes that will be resold will not be called vintage or classics.

When the REOs will have been all bought up and morphed into the regular real estate market and buyers will have had their credit scores improved and they will have become employed again, there will be a demand for employees and those employees will want their own homes again. Once again there will be a larger demand than supply in homes. That is when we can expect a steadily, more saner rise in real estate values.

That is when today’s home sellers can expect to get a better price than what they have resigned themselves to today. But it will take time and by then the inflation rate will warp our sense of values all over again. But that is another story.



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