Things to know in a changing market

Many Oregonians would argue that Oregon is on the forefront in politics and environmentalism. But in the economy, the state is often a laggard.

Things that hit bigger states like California and Florida first, usually come to Oregon last. That applies to the good as well as the bad.

When most states had already pulled themselves out of the recession of the early part of this decade, Oregon was still mired in it. When a real estate boom hit the rest of the nation, Oregon's real estate market was practically in a lull. One economist said Oregon lagged about two years behind the rest of the nation in the onset of the boom. She also said Oregon will lag about two years behind in seeing the boom fade.

That economist was a speaker at a real estate seminar in Clackamas in the winter of 2005. She was forecasting a nationwide decline in real estate nationally in 2006, but said Oregon should dodge the bullet until much later. And Oregon did.

But now, nearly two years after that forecast, the real estate market in NW Oregon may have started to turn. Although price data have been mixed, sales have been down in most cities and communities around the region. In a few areas, prices have started to come down a little too.

The cutoff point seems to be about the middle of 2007. Until then, prices continued to be up virtually everywhere, even though sales had been falling at least slightly in many areas in the early part of 2007.

Of course, all good things must come to an end, but the end in the real estate market, like other financial markets, is never permanent. Like stocks and bonds, real estate investments see cycles of good and bad. So the best thing to do in a changing market is not to worry.

Investments in real estate—like those in stocks and bonds—should be considered long-term investments. While a scant few people can make money in a falling real estate market, the vast majority of people don't have the knowledge and experience to make money in real estate in the short term, except by pure, dumb luck.

So the most important thing to remember about any real estate purchase—whether the market is rising or falling—is to do your homework first. Then you won't have to lose any sleep over what the market may later bring. For those who didn't do the necessary research or ask the right questions when making their real estate purchases, a variety of strategies can help soften virtually any blow dealt by a deteriorating market.

1. Be careful with credit.  If you're dying, and you need an operation you don't have enough money for, then by all means, do whatever you have to in order to get the money you need.  Otherwise, be careful about home equity loans and lines of credit. Just because a lender is willing to loan you 100 percent or more of the value of your home doesn't mean you should take the money. If your need isn't an absolute life-or-death emergency, then building up more debt against the value of your home is probably not a good idea.

Even if you borrow only against 95 percent of the value of your home, and real estate prices fall, you can become "upside down" on your house virtually overnight. If you then have to move, you may not be able to sell because you won't be able to pay off your mortgage(s) and the sale closing costs. This can create a downward-spiraling financial situation that can ruin your life, your marriage, even your career.

If your financial situation changes when you're upside down on your house, and you find yourself without enough money to make your mortgage payments, you can't even sell the house to protect your credit history. You have nothing to borrow against because you've already borrowed it all. You'll lose the house, you'll lose your good credit, and you could lose a lot more.

2.  Don't lose any sleep.  If the market changes, whether up or down, there's nothing that any individual can do about it. No matter how a falling market may have upset your plans, remember that life takes us in many directions, and we never know what direction we'll be taken next. If your plans seemed dependent on being able to buy or sell soon, rather than worrying about whether you'll be able to, get professional advice. Make certain you know the current value of your home and potential outcomes in the event of a purchase or sale. You won't know what you can or can't do until you pick up the phone and talk to a professional. And if you can't do what you want.... Don't worry!  Just start planning the things you can, and be patient; wait for the market to turn again. It will.

3.  Don't try to time the bottom.  Some people put off buying, thinking it's best to wait until the market reaches bottom, so they can maximize their investment. The problem is, no one knows where the bottom is until after it's already been found. What that means is, real estate professionals and economists can't predict the future any more than anyone else can. The way they tell where the bottom in the market has occurred is by looking back in time at sales and price statistics. Eventually, they find where the market "bottomed-out" when they see a decline in the historic data that they examine. Consequently, they only find the bottom after it's too late.

The best strategy to deal with buying in a falling market is to enlist the help of a competent professional, and do your homework. That means getting valuation data on homes that interest you. It means researching market data to get an idea of what's been happening in the months and years leading up to your purchase. It means investigating a property's history and condition thoroughly so you don't overlook any deficiencies or anomalies. It means negotiating hard to get the best deal. Ultimately, if you don't overpay (according to the market at the time you buy your home), you should be fine in the long run. Remember, the market is cyclical. Prices will rebound.

4.  Think rationally.  If you want to move, don't feel like you absolutely must get a higher price for your home than your neighbors got for theirs so that you'll be able to afford to buy another house. Remember, if your house is being affected by a falling market, so are other houses. In fact, a falling market can be the best time to sell in order to buy another home. Remember, your salary or wages aren't going to fall just because housing prices do. Hence, falling home prices make homes more affordable. And, if you sell before you buy, you increase the odds that you'll maximize your real estate return in relation to what you pay for the home you later purchase.

Buyers who'll do best in a falling market are those who are able and willing to sell their home first, then move into a rental property while prices continue to decline. That way they get the benefit of having all the time they want to find just the right property for them, and they compound the power of the dollars they made on their home sale as prices continue to fall.

5.  Get competent advice. Getting professional advice and competent advice are not always the same thing. Many people in Oregon get paid for selling homes and investment property. All of these people get to call themselves Realtors® for no other reason than that they pay their annual dues to the National Association of Realtors®. But not all of these people have the same level of skill and experience.

When you need information about real estate, talk to someone you know and trust. But also talk to someone who you know has years of experience and hundreds and hundreds of hours of education and training. When you're seeking information, make sure to judge the source of the information. What are the credentials of the broker presenting the information? Is he a graduate of the Realtor® Institute? Is he an Accredited Buyer Representative? Has he studied real estate taxation? IRC 1031 exchanges? Real estate investment strategies? Can he provide references from past clients? Does he explain concepts in a manner that is understandable? Does he listen to your concerns, and focus on your needs and desires?

Don't decide a broker's competence based on the price he suggests for your property! This is probably the biggest and most common mistake that property owners make when choosing a Realtor®. No matter how good a negotiator a broker is, the broker doesn't dictate price, the market does. You need to choose a broker based on his level of experience, what kind of connections he has in and out of the real estate industry, and what steps he will use to market your property.

A surprisingly high number of people choose a broker based primarily or entirely upon which broker quotes the highest price or price range for their property. Many of these people automatically assume that any broker who suggests a lower price is trying to take advantage of them and get a quick sale. The reality is that valuation analysis is not an exact science, and leads to conclusions that can be very subjective. Even licensed appraisers rarely reach agreement on the value of a property. Hire three appraisers, and you'll literally get three different appraisals with three different values for the property being appraised.

You certainly want to talk to the Realtor® who has the most training and experience at pricing the kind of property you have. Ultimately, however, you alone decide on your price, and the person who's going to have the best chance of getting you that price will be the broker with the most solid marketing plan and the willingness and ability to work hard to attract other buyers to your property.

For more information about choosing a qualified real estate broker and about how to buy and sell real estate, visit the Advice Center at NWHomePro.com.