2009 "Dear Client" Letter - Part 2

Rational Moves in an Irrational Market

Cont. from Part One:

--Two. If you're a Buyer, take advantage of a soft market to upgrade. That's what stock market investors do during a bear market. Specifically, they buy blue chip stocks that are temporarily "on sale."

Similarly, today's real estate downturn has lowered the entry point for many desirable Twin Cities neighborhoods by $20k, $50k, or more. Dropping home prices, plus cheap mortgages, spells opportunity for millions of younger Buyers. Meanwhile, if you're a move-up Buyer, you're likely to be pleasantly surprised by how much house you can afford, in neighborhoods you wouldn't have dreamed of looking at before.

If you're a Seller, consider taking your lumps. Casting aside all the forecasts -- a good idea, I might add -- no one really knows whether housing prices are headed up, down, or sideways the next 12-18 months.

That depends on interest rates, the national and local economy, unemployment levels, etc. -- complex, inter-related variables that even the pro's get wrong (forget about predicting the future; most economists can't even get the present right: witness the one-year lag diagnosing the current recession).

So if your life circumstances dictate making a move this year, you may just want to . . . move. If you're buying something else, whatever you lose as a Seller may very well come back to you as a Buyer.

In that vein, if you're a prospective downsizer contemplating becoming a renter . . . you may want to consider buying something smaller instead.

Psychologically, it's a lot easier to pull up stakes where you've lived for decades if you're excited about where you're headed. Given today's historically low rates and record-high inventory, the odds of finding a great townhome or condo are a lot better than finding something equivalent in today's increasingly crowded, picked-over rental market.

If you're a longtime homeowner, keep in mind that, while you may be getting less than you might have 2-3 years ago, you're still getting more than you would have 5 years ago -- let alone 20 or 30. Thanks to residential real estate's favorable tax treatment, all of that gain is likely tax-free for most Sellers (no capital gains tax is due on the first $250k of gains for qualifying singles, and $500k for couples).

Three. Read my blog, City Lakes Real Estate (http://www.citylakes.blogspot.com/). Ok, that may not qualify as a "tried-and-true" strategy, but it's still a good one.

Since I started the City Lakes blog more than a year ago, I've posted almost 200 pieces discussing emerging real estate trends, both local and national; market tips for Buyers and Sellers; and how to think about and make sense of broader economic issues.

It's been both gratifying and thrilling to see the City Lakes blog cited by a variety of influential news sources and opinion leaders, both online and off, including The New York Times, RealClearMarkets.com, The Star Tribune, and even Edina Realty senior management (it's spelled K-A-P-L-A-N, guys).

I'm confident that you'll profit from reading my blog. However, just to make sure, if you subscribe by January 31, I'll mail you a $5 Target gift certificate (Dunn Bros., if you prefer). Don't worry, the subscription's free.

While no one knows what the future holds, it's also true that no one needs to simply wait for it, passively. One of my favorite cartoons shows two vultures sitting on a tree limb, with the caption, "To hell with all this waiting -- let's go kill something."

Wishing you good hunting, and a happy, healthy 2009!

Ross