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Written by Rich Reed

hen I consider all that happened in 2008, one question comes to mind: “Other than that, Mrs. Lincoln, how was the play?” I have to admit that I am glad last year’s real estate market is in the rear view mirror. We may have more of the same for a while, but at least we are one year closer to being through this cycle in the market. So as we continue moving forward into 2009, we should be mindful of a few fundamental principles when it comes to real estate.

Real estate is a long term investment. Many believe long term investing in real estate means one year instead of six months. Indeed, 2005 saw examples of that being success-fully achieved. However, investing in real estate is more realistically five or more years. Not all markets are the same. Historically our market will go up 2-3 years, and then down 2-3 years. Meanwhile values consistently improve over time. So even though a down market obviously has values lower than the most recent upswing, those values are still generally higher than in previous downturns (and sometimes higher than in previous upswings). Thus, Sellers who have owned their property more than 5 years typically see their profits maximized in an up market and their losses mitigated in a down market. This is especially true if owners bought the property during a particularly distressed time (hint: now is one of those rare times in our market).

Fear and Greed skew markets. I spent more than a decade prior to entering the real estate industry conducting research on human behavior which culminated in a graduate degree in Psychology. Yet I still find it amazing that even though most market participants (both Buyers and Sellers) know the perils of following the “Herd” mentality, so many do! Greed saw Buyers putting themselves at risk to cash in on the quick market upswing of 2004-2005. Many overextended them-selves and bought properties at the height of the market just because they saw others doing the same. But today’s market is being driven by Fear. Sellers are understandably worried about their jobs, about their 401Ks, about the neighbor who has a legitimate distress sell next door. Nonetheless, while there are those in this market who absolutely have to sell, there are others exacerbating the problem by simply giving in to the Fear emanating from the News (some legitimate and some sen-sationalized) even though they do not need to sell. Such sellers are unnecessarily forfeiting equity out of fear. I always tell my clients today that, “If it is not taking food off your table to own your property (like it is some folks) – selling today is not a good idea.” The market will return...it always does.

But there are those who have to sell. They do not have time for Fear to cycle out of the Herd. Instead, they have to realistically price their properties below the market for financial survival. Therefore we are seeing prices at levels that have not been seen for years!! Buyers who were once priced out of certain neighborhoods no longer are. Rental properties near the beach that were once out of financial reach for many buyers have seen major price reductions too. Prudent Buyers – not those who typically run with the Herd – know this. My partners and I have been busy showing property throughout the area as these buyers do their homework in preparation for the once-in-a-lifetime opportunities that are arising. For example, I recently received a call from a Chicago client bracing for a winter storm (it is sunny and warm here to-day). His family has vacationed here for years and has always wanted to own something near the beach. He believes now his financial risk is greatly diminished by today’s prices. He is right.

The 2009 market will undoubtedly have its own challenges. Who knows what big news item will occur to feed the Herd’s Fear? But there is much to be optimistic about in addition to historically low interest rates and unbelievable prices. We are now three years into a down market and that much closer to a rebound. Depending on the numbers you look at, our market in 2006 saw a 52% drop in transactions from 2005. But in 2008 – a horrific environment for real estate that saw unprecedented media coverage of a mortgage crisis, a meltdown and bailout of the financial industry, an election and much more to feed the Fear – our market saw only a 12% decline in transactions from the previous year. Frankly, I would have expected much worse had we known all that would transpire throughout the year. Are we at the bottom? It is hard to say. Will it last another three years? Historical data says no. But employing some of the fundamental principles dis-cussed above – buying today is not greed. It is smart.