Buyers Want Cheap Dirt, Not Just Dirt Cheap

J Philip Faranda January 13, 2009

I relate to people that bought a house in the boom, spent thousands improving it, and then are told that it is worth the same or less than the price they paid, even with the improvements. Very discouraging stuff. What sellers need to realize, however, is that home buyers today are not buying roofs, windows, bathrooms or kitchens. They are buying the land under those things. And that land is, in a large sense, a stock certificate in the economy. It relates to supply and demand. When the economy goes down, demand goes down, & inventory goes up.

Lower supply =higher prices. See 2005. High supply= lower prices. Look out the window.

Right now, supply is enormous and growing, because more and more people are losing their jobs and being forced to sell. Unemployment was below 5% prior to 2008. 2009 forecasts are for close to 8%. That will flood the already swollen supply with even more distress sales, short sales, and bank foreclosures. If you have a nice home to sell and want what you feel is a reasonable price, you need to understand that you are competing with unreasonably lower prices all around town. Buyers know this, are concerned for their own jobs and security, and therefore want to buy for as low a price as possible.

This is no different from the seller -driven spikes up in price when the market was higher. The current market would turn around in 180 days if everyone lowered their price to reflect the /crash/correction, but that is unpalatable for some and impossible for others with no equity. Short sales would help those people, but that would require the cooperation of the lenders whose deplorable judgment got us into this mess. And until banks can streamline the short sale process to something that doesn't seem like a 4 month root canal, we will have ridiculously high inventory.

Make no mistakes about it. Your kitchen hasn't lost value, nor has your roof, granite countertops or hottub. But the dirt beneath has lost value, and until adjustments are made to address the preferences of the cautious, nervous buying public, the value of that dirt will remain suppressed.  

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