Real Talk: Understanding the “fundamentals” of real estate

Real Talk: Understanding the “fundamentals” of real estate
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By Ellis Duncan

To understand fully the nature of real estate availability and pricing, I believe that it is important to understand the difference between product and commodity. This will seem obvious to most, but I am constantly surprised by people expecting the market to act how they wish it would, instead of accepting the fact that the market is unpredictable and then adjusting to it accordingly.

A product is a compilation of ingredients all with varying fundamentals affecting pricing, but the successful marketers buy the individual ingredients piecemeal as pricing allows. By exercising this practice of “hedging,” they create a buffer from the current market pricing of those individual ingredients and, in effect, retain the ability to price their product competitively on the store shelf.

Real estate is exactly like any other major traded commodity, such as silver, wheat, orange juice and pork bellies: It is closely tied to the “fundamentals.” When a freeze is threatening Florida, orange juice prices soar. If the growing season for grains is blessed with ample rain fall, then the price of wheat and most other grains falls.

The D.C. area real estate market experienced doubling prices every 10 years over a 50-year period from 1958 until 2008. Then the federal government determined that the lenders were out of control and clamped down hard. It became mandatory for a home sale to be backed up by a recent comparable sale in the same neighborhood. Without the ability for families and individuals to carry forward positive equity to a new home or property, because lenders would not budge above that last nearby sale, they were “frozen” in place.

Then the fundamentals changed drastically when the COVID-19 pandemic hit the country. The home dynamic switched from family time, meals, school and R&R to full time school, office and home duties. This new stress factor was the impetus for explosive creativity in financing that enabled a buyer to find a home and pay the extra money above the appraised value in order to win out over other potential buyers. Soon a fresh well-spring of eager buyers were doing the same by digging deep into their personal savings or getting help from family members, and now, after some early frenzy buying, things are getting back to normal.

Prices in our area will continue to climb due to the significant federal government, diplomatic and military presence in the area. There was never a problem with the real estate market, just with questionable banking practices. The prices being paid today may seem high, but I predict in three to five years they will seem very reasonable in hindsight.

The writer is a licensed realtor at Coldwell Banker Realty in Alexandria.