Real Estate Revisited, Part 4

WHAT PLANNERS SEE

Regardless of whether home prices will stabilize or whether they'll fall further, many financial planners will be discussing expectations about home purchases and sales at client meetings. "The demand for housing has not gone away," says Jane King, president of Fairfield Financial Advisors in Wellesley, Mass. "People still want to own their own home or have a second home."

She adds that when a client wants to buy a home, her firm will model the purchase. "We'll show clients how buying the place will affect liquidity and the income they can expect in retirement."

The housing slump of the past few years has had a visible impact, though. "There's not as much euphoria among buyers as there was a few years ago," King explains. "They're more likely to offer a certain amount-what they think is a fair price-and then back off if the seller doesn't accept."

King recounts the story of a client negotiating to buy a second home now, from an estate. He offered $650,000; the seller wants $800,000. If the seller won't come down, she says her client will walk away from the deal. He doesn't think that there is a line of buyers who will be bidding against him, so the seller might reduce the asking price.

According to King, her clients who are looking to buy a home are not so worried about whether we've finally reached the absolute bottom in the housing market. "Buyers aren't concerned about prices going down more in the next year or two," she says. "They're in it for the long term, not to flip houses."

SELLER'S REMORSE

However, many home buyers are sellers too; they're moving up or down in the housing market. And not every would-be buyer is an eager seller.

Marc Freedman, who heads a financial planning firm in Peabody, Mass., says some of his clients are thinking about selling their house and downsizing. They might want to move into a retirement community, where they won't have to do as much home maintenance. However, a lot of them are reluctant to sell now because they don't think they'll get the price they want-they have a certain number in their heads as to what their houses are worth.

That number, unfortunately, might be based on what similar homes sold for in 2005 or 2006. Few sellers will get such a price now, so they're holding on to their present house. "Often, they don't realize how much it's costing them to stay there," Freedman says.

Those costs are not just the obvious ones, such as property tax and homeowner's insurance, according to Freedman. Clients also have maintenance costs, including landscaping and plowing. They may be paying a great deal for heating and electricity, especially if they're still living in the big house where they raised their kids. Freedman adds that some of his clients pay a great deal for expenses related to their home swimming pool, even though they might use it no more than three or four times a year."

Clients who are unwilling to sell might be greedy. In addition, they might be looking for an excuse not to pack up a house, Freedman says. "If clients are downsizing, they might be worried about fitting everything into a smaller home."

As Paul Gydosh Jr., managing director of Kensington Wealth Partners in Columbus, Ohio, points out, "Clients who want to sell one home and buy another have several options. They might wait to sell at a higher price, carry the costs of two homes (if they can afford it), rent their former home or sell it to their kids. The most common solution is to reduce their asking price, sell the old home and buy a new one."

Gydosh explores all the options with clients, helping them come to a conclusion. "We've seen instances where a home seller was frozen over a small gap between his asking price and the bid, and we pointed out how little a difference that would make in his net worth," he says.

In some Midwestern cities like Columbus, neither the housing boom nor the bust was as extreme as it was in other areas of the U. S. "Sellers here might not be so anchored to the price they believe their home is worth," Gydosh says. Therefore, they might not be as reluctant to lower their price to close a sale.

Even though sellers will likely have to accept a lower selling price, they could get a good price on the place they buy in today's market. Gydosh tells of a homeowner who sold his place for 10%-15% below the peak price and bought a house down the street for a 30% discount from the peak. "The new home has more square footage, and is also better suited for the wife's elderly mother to live with them."

Even outside the Midwest, there are areas where housing prices have held up relatively well. "Around here, home prices are down 5% to 15% from the peak," says Eleanore Szymanski, principal at EKS Associates, a financial planning firm in Princeton, N.J. "At today's levels, some clients are willing to sell-and they're able to. One $700,000 home sold in three weeks; the sale fell through because of mortgage problems. When the house went back on the market it sold again, in another three weeks."

As Szymanski's anecdote indicates, lenders' extreme caution may be jeopardizing home sales now. "They're putting loan applicants through the ringer," she says. "Clients who are thinking about selling their home expect prices to move up, probably within the next three to five years, which could happen once the banks loosen up a bit." A return to the days of mortgages-for-anyone may not be desirable, but the residential housing market might look a lot healthier if lenders were as reasonable about the loans they make as they seem to be about the properties they have to sell.

By Donald Jay Korn

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