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Risk & Reward

Posted on Dec 11, 2008

As 2008 winds to a close, I feel compelled to do a little reflection and projection. From a Real Estate perspective, it has been a challenging year. Historically, we’ve not seen such froth in the economy as a whole as we’ve witnessed in the past 12 months, since the Great Depression.  This hyperbole has become a staple for 6 o’clock news reports; in fact, if there has been any consistent theme to sum up the year, I’d think a heading along the lines of “Great Depression: the Sequel”, would encapsulate the general media mood, and the extent of most reporting on the subject.

However, there are a few key points that have gotten lost in the rush to spill red ink on the headlines. Just this past week, I finally saw a new piece in the PI that touched on the opportunities this market presents for first-time buyers. Another point that’s frequently forgotten in all the talk of recession is the amazing fact that we’ve never seen the unique set of factors currently in place: low interest rates paired with a buyer’s market. Recession typically is accompanied by high interest rates- the last big one in the eighties saw rates over 18%! We’re looking at a realistic possibility of 4.5% in the New Year.

It’s easy to let the nightly fear-fest of network news argue for the conventional wisdom of hunker-and-hold economics. And I’m not here to recommend that prudence die on the altar of consumption. However, there is a solid argument to be made for recognizing opportunity. In fact, as everyone’s favorite capitalist, Warren Buffet, is fond of saying, “Buy low, sell high”. If you’re an investor or first-time buyer, 2008 has served up an extra helping of opportunity.

With rates at historic lows, home prices rolled back almost 3 years, and a steady supply of inventory to choose from, this is truly phenomenal timing for those in a position to capitalize.

Before I leave the subject of rates, consider that a homebuyer in the $400k range (the King and Snohomish median price) can now afford $30k more house with the same payment than they could just a week ago. And, with the ability to negotiate strongly, the price of that $400k home may also be brought further into the ‘comfortable’ range.

All this talk of recession inevitably leads to asking “when will it end?”. In a recent online poll by Keller Williams and Baylor University, 840 leading economists were asked that question, and roughly 75% of them said 3rd quarter 2009. Now, I’m not going to argue for someone else’s crystal ball, but I have to hope these folks have some idea what they’re talking about. And, if crowd-sourcing is to be believed, this is as good a source as you’re going to find. Granted there are detractors from this view – obviously, 25% of those polled weren’t so bullish. However, that’s the case with just about everything, so I’m going to make a leap and say that, barring unforeseen negativity on the market front, we’re going to see a happier end to 2009.

It’s the unforeseen part that has most folks sitting the fence in the face of all this opportunity. I probably shouldn’t rehash the cascade of banks failures, Wall Street bailouts, unemployment numbers, etc. However, I believe it’s important to put this all in perspective, and realize that there is no such thing as opportunity without risk; the two always travel together. Risk & Reward; opposite sides of the same coin.

I am currently working with a buyer who is very aware of this fact, and as we’re negotiating his short sale purchase, he’s anxiously watching rates. The auto-notification from his bank kicked out an email last week, letting him know that rates had hit his target range; at 4.75% on a 15 year fixed, down .25% from previous lows. Now that’s something to get excited about!

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