Real Estate Low Down
Thursday, August 09, 2012
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REAL ESTATE LOW DOWN
I enjoy economics. It was my major in university and it continues to intrigue me today. At SFU, Economics was part of the arts department as opposed to being part of the business faculty. I never really understood why until I got into 3rd and 4th year courses. Then I started to figure it out: Economics is an art because it defies logic. It is impossible to predict the future when the crazy human psyche is part of the equation. Take the Vancouver real estate market for instance. When the market is hot and prices are rising, people don’t think twice about buying. In fact, it is quite common to bid 10%-15% over asking in a multiple offer situation. Yet, when the market turns around and Buyers have the opportunity to negotiate 10%-15% below market value, many panic and run for the hills!
I’ve endured a couple cycle revolutions since I began my career in real estate and this phenomenon never ceases to amaze me. Take the rudimentary diagram I built below. It would be nice if we all had the insight and luck to buy at the low point and sell at the high point, but the truth is that even if you were skilled enough to predict those moments; you’ve already lost all your bargaining power.
A seller's market is just the opposite. The demand is larger than the supply. People have more money to spend on real estate, so sellers will often see several buyers competing to buy their property, which drives up the price. This means that buyers will have to spend more to get what they want. This is the ideal situation for sellers because they get a great price on their homes.
And when there is no clear advantage to buying or selling, then the market is balanced. Usually prices don’t fluctuate much during these conditions.
Any savvy long term investor would agree that the best strategy would be to buy when you have the power to negotiate the best deal. You will have more supply to choose from, more incentives from banks and developers, and more time to consider your decisions. Now is exactly one of those times, however experience tells me that just the opposite is true and the majority of Buyers will wait until the market turns around before jumping in. Perhaps this is why I enjoyed my minor so much - Psychology.
I’ve endured a couple cycle revolutions since I began my career in real estate and this phenomenon never ceases to amaze me. Take the rudimentary diagram I built below. It would be nice if we all had the insight and luck to buy at the low point and sell at the high point, but the truth is that even if you were skilled enough to predict those moments; you’ve already lost all your bargaining power.
Logic tells us that in a buyer's market there are more people looking to sell houses than there are people looking to buy houses. In these conditions, sellers may have to accept a lower price than they want to sell their home and may have to resort to offering special incentives such as longer completion dates, rent backs, included items, etc. This is the ideal situation for buyers, because they can get a great deal.
A seller's market is just the opposite. The demand is larger than the supply. People have more money to spend on real estate, so sellers will often see several buyers competing to buy their property, which drives up the price. This means that buyers will have to spend more to get what they want. This is the ideal situation for sellers because they get a great price on their homes.
And when there is no clear advantage to buying or selling, then the market is balanced. Usually prices don’t fluctuate much during these conditions.
Any savvy long term investor would agree that the best strategy would be to buy when you have the power to negotiate the best deal. You will have more supply to choose from, more incentives from banks and developers, and more time to consider your decisions. Now is exactly one of those times, however experience tells me that just the opposite is true and the majority of Buyers will wait until the market turns around before jumping in. Perhaps this is why I enjoyed my minor so much - Psychology.
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