Selling Real Estate at 180 Miles Per Hour

An economic slowdown doesn’t mean there aren’t bright times ahead.

December 1, 1998

You know the disclaimer on mutual fund prospectuses warning that past performance isn’t an indicator of future growth?

With all the reports about an economic downturn, it’s possible that warning is nagging at your psyche, making you question the future growth of your own business.

It’s true that in 1999 the country will see an increase in unemployment, the slowing of housing construction, and a drop in consumer confidence, says David Lereah, senior vice president and chief economist for the Mortgage Bankers Association of America, Washington, D.C. “That'll make homebuying less appealing than in the past two years.”

But industry economists say it’s best to keep things in perspective.

“Even though sales and housing starts will slow, they’ll still be at levels that a few years ago would have been considered strong,” says Bob Van Order, Freddie Mac chief economist.

John Tuccillo, president of JTA Inc., Arlington, Va., and consulting economist for NAR, says, “Any slowdown is going to hurt because our expectations keep getting notched up.”

Elizabeth Bechmann, a Silicon Valley, Calif., venture capitalist, put the anticipated downturn in perspective. During an economic roundtable discussion on PBS’ NewsHour With Jim Lehrer, she described the housing market some real estate practitioners in her area have become accustomed to: $5 million houses that receive multiple offers over the asking price and sell in three days. “Now, I think it’s safe to say, such a housewould probably sit on the market for maybe three weeks, which has been unheard-of out here the last couple of years.”

Her description of the slowdown: “It’s as if we had gone from 200 miles an hour to 180, instead of from, say, 100 to 30.”

The bad news: International problems touch down

Most economists aren’t using the dreaded r word to characterize 1999.

“We don’t expect a recession,” says Jason Altman, NAR senior economist. “But you can’t keep up this kind of pace with everything that’s going on.”

That “everything”—the Russian economic crisis, the Asian financial markets, and some faltering Latin-American economies—is already leading to trade problems, causing U.S. manufacturers to see a business decline, says Altman.

“The loss of export sales will probably take about three-quarters of a percentage point off the growth rate of our economy in 1999,” says Fred Flick, NAR vice president of economic research.

“The economy tends to go down in a multiplicative effect,” he adds. “There's a cut in demand, companies lay off employees, unemployment rises, and it circulates through our economy.”

Practitioners working in markets where the employment base is dependent on exports may have reason for concern. “Problems in other countries will cut into our exports,” Van Order says. He points to Southern California—Long Beach and Los Angeles, specifically—as an example of places that could feel the pinch the earliest and strongest because they’re major shipping points to Asia.

Another issue is the volatile stock market. “Volatility will eventually dampen consumer confidence and a desire to spend. That will cut into home sales,” says Lereah. Tuccillo expects the Northeast would suffer most from a stock market decline. “That’s the area where they’re directly dependent on the stock market as an income generator,” he explains.

The good news: It’s still a local business

Despite the anxiety on the national and international stages, analysts point out that real estate is still quite dependent on local factors and that you should keep your eye on your area's employment numbers to gauge your market's health.

A new manufacturing facility in your neck of the woods could still signal a bright year for you—even if the national economic news is bad.

Altman points to Charleston, S.C., as an example. Two or three companies moved in and brought a bunch of employees with them. This year Charleston is nearly leading the nation in terms of the price and appreciation of homes. “If you see growth and new companies, it’s a good sign that you're in for a strong housing market,” Altman says.

Demographic bright lights

For the past several years, economists and trend watchers have been pointing to baby boomers as a demographic group having an influence on the housing industry. That hasn't changed.

“They're going to be a significant part of the market,” says Altman. Some, relieved of college tuition burdens, may trade up to a larger dream home, whereas others may respond to the empty-nester syndrome by trading down.

Van Order expects boomer buyers—both those trading up and those trading down—to make larger downpayments and pay off mortgages quickly. “I think we’ll see a bit of a trend toward 15-year mortgages because [the boomers] can afford the higher payments.”

Another demographic group that could fuel the housing market is affluent young people who are first-time buyers. (For insight into young buyers, see “Media-Versed Gen X Can Spot a Sales Job,” Today’s REALTOR®, March 1997, page 25.)

“It’s a good time for first-time buyers because interest rates are low and it’s easier to get low downpayment loans,” notes Van Order. And, predicts Altman, the lower the mortgage rates go, the more first-time buyers we’re going to see because it gets cheaper to buy than to rent.

Of course, if serious belt-tightening takes place, first-timers and the nontraditional buyers who've provided a boost to home sales the last couple of years—minorities, moderate-income buyers, and immigrants—may face hard times in 1999.

“The lending industry has done a good job of being more flexible on credit and offering high loan-to-value products,” says Lereah. “But as the economy deteriorates, the supply of those products will probably drop, which could be a negative.”

Aside from that potential problem, 1999’s economic decline may wreak more havoc on your mind than on your business.

“People have come to expect a booming market,” says Tuccillo. “As things begin to slow, I think they’ll perceive things to be more severe than they actually are.”

The bottom line: Even though sales are expected to contract, “we’ll still have near-record home sales in 1999,” says Lereah. “It'll be a good year.”

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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