John M. Lee: Tragedy also Effects Real Estate

The events that unfolded in New York, Washington D.C. and Pennsylvania have also affected our lives here in San Francisco. Ever since the terrorist act at the World Trade Center Sept. 11, our real estate market has come to a standstill. Many of you have called inquiring about the state of the market and here's how I see it two weeks after the terrible incident.

The real estate market was already in a state of transition. Prices have already fallen this past year, more in some areas than others. The high-end properties were hit first, followed by the middle market. The lower-end market was affected less.

Most of the problems were traced to a weakening economy, declining stock market, burst of the Internet bubble, massive lay-offs, lower consumer confidence and a general uncertainty about the economy.

The real estate market tends to lag behind the stock market. The stock market is a leading economic indicator that attempts to predict where the economy is going; real estate follows because it is a lagging economic indicator.

For example, people need to have confidence that they have a stable job and a downpayment before making a commitment to purchase a home. That happens when the economy is doing well and the stock market is climbing in value.

When companies are laying off employees or when there are threats of lay-offs, and the stock market is declining, people often feel less confident in their purchasing power and they tend not to spend, preferring to hold onto their cash.

That was the state of the real estate market before Sept. 11. Properties were selling, though at a much slower pace than the past two years, and prices were sliding downward. After Sept. 11, the real estate market stopped altogether.

So what does this mean? The only guidance we can use is past history to see what happened to property values during a crisis. Usually, the stock market declines immediately because it dislikes uncertainty.

But prices usually rebound when the crisis clears up or when there is a clear direction about how to proceed. That usually takes some six to nine months, so we may have a good stock market rebound in the latter part of 2002.

With real estate prices lagging the market by another six months, it will probably be 2003 before we see a rebound in the real estate market.

During the last downturn, led by the 1989 earthquake and the 1991 Persian Gulf War, our real estate market was flat until 1995.

The question arises: what should you do if you are a buyer or a seller in this market?

For sellers, I think the answer lies in your planning horizon. Obviously, if you need to sell within the next two to three years for whatever reason, you should sell now rather than later as prices will continue to fall in the immediate future.

Remember the stock market - we all should have sold everything in our portfolios last spring and if we did not do it, we should have sold it in the fall. The lesson: when prices are falling we can constantly chase a declining market and losses just get larger and larger. It is better to cut losses earlier rather than later.

For buyers, I would suggest that you take a longer horizon. If you situation dictates that you purchase property right now, remember that in the long term real estate prices always appreciate and you can always take advantage of the tax benefits of owning property.

In the upcoming months, there will be many opportunities to purchase good, solid prime properties at good prices. The wise investor buys when no one is purchasing, rides out the cycle and then cashes out when the market peaks again.

So, be prudent and be watchful for some nice upcoming opportunities in the real estate market.

John M. Lee is a top-selling broker with Pacific Union. For question, call him at (415) 447-6231 or e-mail him at : isellsf@aol.com.