The Great Deal vs The Great Value

by David Elton                                     

The voice tinged with rasp on the line was that of my client Henry from New Jersey, ‘New Joizee’ to some.

“Dave,” he said, “I’m done.  Can’t do it.  Sorry if I wasted your time on this thing.”

Henry was a cash buyer.  I’d been sending him 50 to 100k rental property options for about a month.  Originally, he had it in his mind to buy “4 or 5”.   “Find me some great deals, “ he had said.

 “How ‘bout a bank-owned 3000 square footer with a pool and three car garage for 100k?  Just came on.  Does that work?” 

Henry wasted no time.  “Did you see the market, Friday?!  Down like a gazillion points.  Who knows where this thing is going?!   I think I gotta keep what I still got!” 

Then in the next breath, “I dunno.  Do you think they would take 60 grand?” 

And so it began and apparently ended just as fast: the quest for next the mythic ‘Great Deal’. 

I remember a time not too long ago cars lined neighborhood streets when new homes hit the market.   Think Super Bowl block party – that’s what it was like.  Agents wrote spur-of-the-moment offers on car hoods, in spare bedrooms, bathroom counter tops.  It was truly surreal.   My point - back then paying 50,000 OVER ASKING was apparently a ‘Great Deal’ to some.  And for the few who sold prior to 2006 – it turned out to be quite the windfall indeed.

Thus, we learn the quest for the next Great Deal is essentially about timing, which is about the future, which as far as I’m aware, is unknowable.

The reality is that the vast majority of people stayed away from 2002 thru 2004.  By 2005, prices continued to rocket higher.  In some areas prices increased 10, 20, $50,000/week!  Finally, the masses could not take it any longer.  They had to ‘get in’ and ‘get in’ at ANY PRICE.  In their minds ‘ANY PRICE!’ became the definition of the next Great Deal.

Sadly, as in all climax runs, those folks who ‘got in’ late were taken out to the wood- chipper. (This columnist included)   There’s a word for that – greed - the rocket fuel of capitalism.

Which brings me back to the present day and a much different market climate.  9% unemployment, Europe on the verge of collapse, the first truly Global Recession/Depression depending on which ‘expert’ you listen to.  Why, I bet if I showed Henry a house today for $10, he would undoubtedly offer $5.  Can you blame him?  It’s not just him.  It’s the majority of us.   There’s a word for that too – ‘fear’, the kryptonite of capitalism.  

When the stock market finally bottomed in 1932 – it was on one of the lowest volume days in the history.  There were literally no more buyers.  If not for a consortium lead by a banker named E.F. Hutton providing emergency liquidity, (not unlike Buffet today) the financial system may have collapsed. (Sound familiar?)

Turns out if you had bought along with Mr. Hutton at the deepest darkest depths of the abyss you would have tripled your money by 1935.  If you had bought after the crash of October 1987 you would have captured a 10-year bull run in stocks, one of the greatest in market history.

Here’s the brutal, gut-wrenching irony of it all.  Most of us would not take a Great Deal if it showed up gift-wrapped on our doorsteps.  We’re either too afraid prices will go lower (fear) or, when we finally do take the plunge, it’ll be when prices have already spiraled out of control. (greed) 

The result – most of us never win! 

So, is this a good time to find a Great Deal you ask?  Don’t know.  As my broker/brother likes to say, our crystal ball is in the shop – so rather than focus on the unknowable, what we prefer to do is look at empirical data, breakdown the numbers to give us clear perspective and see if we can find – a Great Value – today.

Case-Schiller just released housing numbers for August.  Phoenix showed a .01% decline in housing prices.  More data:  Phoenix median home price has remained in the 115k to 120k range for most of the past year.  By comparison – Houston is 159k, the Northeast 200k+.   Today, we have one of the most affordable housing markets in the country when compared with other major metro areas.  Current prices are now below pre-bubble levels in most areas.  Early in 2010 our MLS inventory reached over 60,000 homes –now we are under 20,000.  Combine that with the lowest interest rates, solid growth projections and the highest rent rates in our history and some extremely motivated sellers and you have the recipe for what could be some Great Values today and possibly Great Deals tomorrow and beyond.

There’s a reason large investment firms, (aka the smart money) have been gobbling up properties here by the thousands.   Wonder why?   I’ll tell you.  The smart money always exploits fear.   Which brings me back to yesterday.

The phone buzzed, my ‘Joizee’ client Henry. 

“You mentioned those short sales.  How does that work again?  Don’t they take forever?  They fall apart.  Then what?!”

Wait a second.  Was Henry back in the game?  Was he actually going to take that leap of faith during this, one of the blackest periods for housing in recent memory?  I masked my surprise in an overview about why short sales are perhaps the best game in town for buyers to obtain great value on their purchase.  (Henry had heard this before but was so focused on ‘The Great Deal’ he was after he had missed most of it.)

Silence on the other end.  “I dunno, Dave.  It sounds good, but I gotta think about it.  I”ll get back to you if I’m interested.   But hey.  if they’ll take 50k for that house lemme know.”