From the Newsletter from Gary A. Scott on 1/26/07

Disappearing Investors

Hope to see you in Naples, FL.

A real estate agent (Micky Enright) in Naples recently sent me a note entitled “Disappearing Investors”.
The article voiced concern about the lack of sales at existing real estate prices and asked are existing prices out of touch with the market, or is the market simply standing on the sidelines.

The article pointed out that after the hurricane 14+ months ago there was a steep decline in sales that was a strong warning. Now sales figures for the last 75-days are even lower than for the 75-days following that Hurricane.

Naples is in the midst of its “winter season real estate market” and price reductions have increased dramatically over the past 3-months, due in large part to sellers not wanting to sit on properties for another 6 or 12-months when the “season” ends. The article said:

“As the realization of a very slow season becomes a reality, we will see more dramatic price reductions, especially with the properties considered more seasonal in terms of sales appeal.

“Demand dropped because investors ceased being an active part of the buying equation. Stunted sales over a 12-month period have created a backlog of listings. Ultimately, a correction in terms of price will do its best to create an absorption of the listings. As the aggregate pricing drops, the perceived value to investors will be increased, and the pace of sales will increase. Sellers will have to recognize that they either drop their prices to meet the market, or wait another year for an opportunity to sell. And there will be no guarantees of next year, just like there were no guarantees of this year; very straightforward, very realistic. It will be a tough year. These things don't turn on a dime. We have a lot on our side.”

This broker was correct in what was written. Real growth becomes a bubble when prices rise beyond real value investors who jump in based on “the greater fool.” They buy in the belief that some fool is wiling to pay an even higher distortion because they also think someone else will pay even more. Eventually the greatest fools get caught.

The question is what is the real value? Sometimes the tops of a bubbles can give us a clue. Where prices have gone, they can go again. However, we never want to forget gold’s $860 an ounce bubble in the 70s. Waiting for that top to be reached again has tried even the most patient investor.

A better guide is probably what people can afford and are willing to pay for rent. Prices of property can rise with wages or as social norms and habits of what percentage of their income people will pay for their homes. People can shift from living in free standing houses on large tracts of land to living in condos that share land. They can shift from every generation having a family dwelling to several generations living together in a house.