The Market is Slowing for sure. Now what?

From the perspective of my advanced age, the current slowing of real estate sales has both a familiar look and a few unusual features. Let's start with the unusual part.

This is not the first time that the market has slowed because the Federal Reserve has raised interest rates. In the late 1970s, as inflation spun out of control, the Fed-under then-chairman Paul Volcker put the squeeze on liquidity with both fists, and mortgage interest rates eventually rose to a range of 16% to 18%.

Ever try to sell property with an 18% mortgage? You look for all available alternatives, and what we found were ways to force assumptions of existing loans-transactions called "subject to's" because the home was purchased "subject to" the existing loan.

This was a rather shaky strategy, though it had exponents who were rather well-known at the time. But the Supreme Court brought an end to the "subject-to" maneuver by affirming that lenders could call their loans if title was transferred and they hadn't been given the opportunity to qualify the new buyer and either raise the interest rate on the existing loan or charge an assumption fee.

In time, interest rates came down again. Life went on. And indeed, the real estate market recovered in a big way. (It's worth remembering that it did - though it's sobering to recall that the real estate market went through a very tough time at the end of the 1980s and beginning of the 1990s, with some homes losing enough value that they were suddenly "under water" - that is, they had a larger loan against them than they still had market value). Again, though we weathered our way through this difficult season - which had been largely caused by overbuilding and by the fact that many industries, particularly related to defense, all but emptied their employee rolls into the streets and people had to sell their homes and move.)

Okay, back to the present. We don't have significant overbuilding at the moment (except for overly optimistic condo projects). We don't have a raging inflation rate that has to be brought down, no matter the pain caused by the apparent cure (i.e., sky-high interest rates). We don't have an economy that is in trouble, at least not yet. And interest rates really haven't been pushed up by the marketplace so much as they've been coaxed higher by a series of quarter-percent rate hikes by the Fed.

Indeed, the current market slowdown is unique in that it has been engineered primarily by the Fed, which sought a smooth landing for the market rather than a crash after four red-hot years of sales and appreciation, and also sought to head possible inflation off by removing the stimulus to the economy that real estate had been providing.

We need to keep in mind, of course, that the real estate market couldn't have continued at its 2005 pace for much longer. The price of homes had been taken to the point where fewer and fewer potential buyers could put together a purchase transaction. Interest-only and option loans helped, but home values just kept appreciating.

We need a breather.

But you rarely get a breather from a real estate market slowdown. Instead, you get a lot of Chicken Littles assuring us that the sky is falling and you probably experience a falling off in the volume of your personal business... because once the real estate market really starts to slow down, the slowing gains momentum, the new listings multiply, the sales come far less frequently and the price appreciation eases down. It isn't always a pretty sight - especially for those who really need to sell their home and sell them now.

APPROACHES TO A SLOWING MARKET:

It's important, I suspect, neither to panic nor to go into denial. I have heard many people in real estate declare that they did well in slow markets primarily because they don't know the market was slow, so they weren't weighted down with negativity about the market.

There is something to be said for this. Specifically: Realize that every market is different and creates different opportunities and then shift your approaches to the business accordingly. Don't get stuck in the idea that a slowing market is a "bad" market. Realize that there is work to do and do it.

Now, if it isn't a "bad" market - if it's just what it is and we don't have to place a value judgment on it - we don't succeed in spite of this market. We succeed both because of it and in harmony with what this market offers.

WHAT DOES THIS MARKET OFFER?

First, realize that we're slowing from the hottest market in this country's history. The market is not currently "slow," therefore, though the slowing has become very real.

Second, take a look at what your potential clients need today. Realize that there is something in our industry that causes us to concentrate on what WE need, rather than allowing us to create a good business by focusing on our clients' current needs. Forget for a moment the fact that you may be concerned about bringing in more transactions and think instead about the transactions you'll be attracting.

Real estate, as the market slows, obviously ceases to be a kind of sport in which people simply buy a new home because they can and sell their old one because it's so easy to do. Instead, they buy and sell because they truly need to - whether because of a job change or family needs or educational opportunity or other possible reasons (which, sadly, may include an inability to continue paying for their existing home).

In a slowing market, these are all people who need all the help they can get - that is, all the help you can give - especially in the form of information. Many sales arise from personal problems. You are the one who can both suggest and explain possible solutions, and also you're the one who can help them run with and make real the solutions they choose.

You're the one. Remember that.

HOW DO THEY KNOW YOU'RE THE ONE?

You show them that you are. Realize that you really can't tell them that you are. It doesn't work that way. No one can tell you, for example, to trust him because, gosh, he's so trustworthy. But he can show you he is, and the word of his clients helps too.

So your clients and potential clients want to know the answers to bunches of new questions, most of them brought on by changes in the marketplace.

*Should I refinance my existing ARM into a fixed-rate mortgage now?

*Is there time to do one last refi - or take on a home equity line of credit - before rates rise higher (if they do)?

*Is it a good idea to use the lump sum I just inherited to pay off my mortgage? If not, why not?

*How can I minimize the tax liability when I sell my highly-appreciated home whose taxable gains exceed $500,000.

*How can I make sure that I qualify for the $500,000 taxable gains exclusion when I sell my personal residence?

*Is there any way to get my retirement home through a 1031 exchange?

*What are the best ways to prepare my home for the fastest possible sale today?

*Does it work to offer the sales agent who brings in the buyers for my home a free trip to Cancun?

*What's the best way to price my home today?

*Why all the fuss about pricing my home too high? I can always come down, can't I?

These questions and a vast number more are rolling around in the minds of people who would gladly become your clients if they knew you would readily give them workable answers to the questions.

So give them workable answers to the questions.

Send out newsletters, brochures, etc. Write a newspaper column. Give workshops and seminars.

With change in the air, and especially after such an incredible real estate boom, people are worried and, as I said, they need all the help they can get. Give them that help - for free - and they will ask for more.

INCREASING YOUR SHARE OF THE MARKET:

This is the time. While others are busily trimming back any marketing they do, you can amp up your marketing a bit - at small expense - and reap great rewards. While people who were never committed to real estate careers in the first place drop out of the business, you can build up your client base. While others in the business wonder why the marketing techniques, if any, that they used when the market was hot probably don't work as well when the market slows, send helpful information out to potential clients. Built it and they will come.

It's also a great time to engineer a new marketing model and a new form of real estate practice. Many in the business will respond to the slowing of sales by reducing the commissions that they charge. Your approach might be to increase the service you provide and to enumerate everything you will do for your clients, gearing your services specifically to a slowing market (for the moment).

We took an introductory look at this subject in the last newsletter. It may be time to think through the way you do business and to come up with some radically different ideas about the package of services that you offer.

One possibility: Many people have been experimenting with a team approach to real estate. Usually, though, the members of this team all perform very similar roles - though one person may specialize in taking listings, another in showing homes to buyers. But if you look very closely at all the services you provide and prioritize them, then add in services you'd like to be providing (but aren't, perhaps, because you don't know how), a question inevitably arises:

How is it that I expect myself to be an expert at bringing in clients, at taking a listing, at marketing a home, at working with buyers, at screening for any potential legal problems, at helping sellers state their home, at helping buyers make the best financial decisions, etc.?

Let's face it. Not only are we Jacks and Jills of all Trades in this business, but we also wind up having to do things we're not all that good at. After all, it takes a rather different temperament to be great at listing a home than it does to be great at intuiting just the home for the buyers you're working with.

What suggests itself is that maybe, in spite of the fact that no real estate firm has ever done this adequately well (and thus the idea can easily be dismissed with words like, "Already tried that; can't be done")...maybe it would be possible to turn various sets of services that you want to provide your clients into job descriptions, and to end up with a firm in which each person does a set of tasks she or he is truly good at - maybe they're even the best in the business at those tasks. Maybe you end up with a whole new kind of real estate company, doing a huge amount of business, revolutionizing the way real estate is practiced.

It's time to think these thoughts and to get off the defensive obsession with keeping things the way they are so that we continue to make money the way we always have.

Staying on the defense could be very dangerous in the next couple of years. Taking the opportunity to revise and remake the way you practice real estate could result in a company that actually has no competition - much as Trader Joe's markets have little to no competition - because there's no one else out there doing things they way you are doing them and a sector of the public has really bought into your new approach to empowering the purchases and sales of real estate.

All right - I will assume you're thinking your own versions of these thoughts. You're probably also wondering where in the world the current economy is headed and what sort of market you should be preparing yourself for.

THE NEAR-TERM ECONOMY:

I simply am not as convinced as are most others (including the majority of Fed governors, it seems) that interest rates are going to rise significantly further. Unfortunately, a possible rise in the rate of inflation continues to threaten the economy and to persuade the Fed governors to continue pushing the fed funds rate anotehr quarter percent higher at each meeting of the FOMC.

It's a difficult call, but the financial markets seem nearly always ready to bring rates down a bit further - as they have in recent days. If the markets don't believe rates should continue rising, the Fed continues to face the Greenspan "conundrum," in which longer-term rates fail to rise even though shorter-term rates are being pushed higher with the fed funds rate.

Further, the next move by the Federal Open Market Committee - which will probably have taken place by the time you read this - is quite likely to be no move at all. The weak 2.5% Gross Domestic Product growth announced last week for the second quarter of this year may be the straw that breaks the camel's back here, sending even the more hawkish Fed Board members into a more conciliatory/less inflation-phobic stance.

In fact, here's a reasonable, if not probable, sketch of what the immediate future may hold. The Fed may leave the fed funds rate where it is at last, and the markets may interpret that as the end of the long string of fed funds rate rises. Good news, they will declare, and the stock market indices may rise as if from the dead, with the Dow Jones Industrial Average exceeding 1300 and analysts filling the newspapers and airwaves with stories about the well-crafted recovery with its (relatively) gentle landing for real estate and its resumption of strength in the rest of the economy.

There are serious problems with this view, however, as I'll describe in a second. These cracks in the edifice may result in a rather rapid erosion in the stock market indices and an increased unwillingness among interest rates to rise.

One of the significant differences between this real estate slowdown and those we reminisced about earlier in this letter is that we aren't facing a rapid rise in inflationary forces, nor are we being pushed along by relentlessly rising interest rates. Rates have risen, yes, but the "conundrum" is still with us, and we keep seeing an inclination in the financial markets to be very cautious about letting interest rates get too high - an inclination, in fact to keep bringing them back down a bit.

One major factor - among many - that is not being adequately addressed is the effect on the whole economy of a definite slowing in the real estate markets. If equity in our homes ceases to grow significantly - and especially if we fear it may fall in a negative direction - we lose a great deal of confidence about how much disposable income we have, about our savings, about our ability to borrow further or, indeed, to service even our current debt.

In short, retail sales decline sharply. And retail sales rather famously make up about two-thirds of our nation's economy.

In short, our economy may slow dramatically.

The first signs that this is happening will likely bring interest rates lower. This will probably not reignite the real estate market, though sales should remain fairly strong (while, perhaps, our value appreciation remains fairly flat: We have to endure a time of bringing values, affordability and income back into balance).

So we may experience an upward move among interest rates and stock market indices, but I doubt it will last long. I also doubt that the real estate markets will grind to a halt. My suspicion is that they will remain an important core sector for the economy - both in a negative direction as people pull back from making retail purchases and in a positive direction as our homes provide shelter and support for our finances today and into the future.

Article provided by Fidelity National Title Company.