The New Normal

I’ve opined here before that I believe that we are witnessing a fundamental reset in the American way of life. Some have agreed and some have pushed back and said that this recession is just a temporary blip and that things will return to “normal” soon. Recently Business Week magazine had an article that I thinks puts it well, too. It was titled “The New Normal”, and it was focused upon the financial aspects of the current, monster recession. Basically the author made the case that we are seeing an adjustment that is permanent to the inflated real estate and stack prices and that a new baseline is being established from which future growth and appreciation will be measured – a reset, so to speak.

For those who bought either stocks or real estate right before the crash, that’s not good news. Basically, that article is saying that the losses that people have suffered are now (or about to be) locked in and that recovery, if it can be called that, will follow a more conservative growth/appreciation curve. For long-time owners of real estate it means that the illusion of wealth that was created in the late 90’s and early 2000’s is gone. If you bought a house in the 70’s or 80’s and held on to it without constantly taking equity out, you are likely fine. You house has likely doubled in value since you bought it, but it is not worth the 3-4 times that price that you once thought it was worth. If you have an appraisal from 4-5 years ago or further back – throw it out and quit thinking about it. That number is meaningless in today’s market and will likely never come back.

For those who ask me how long will it take to get back to the value that the house had when they bought it 3-4-5 years ago, I generally say at least a decade. You bought at the peak and have experienced the worst loss of anyone and it is going to take quite a while at the new, normal rate of appreciation to recover most of that lost “value”, perhaps longer if you have an older condo.

For those still in denial that this is an inflection point in our countries history, I would invite them to consider the number of big name investment banks that are now gone and the fact that General Motors, as we knew it, is gone. Perhaps the Chrysler failure was not such a big deal – they’ve been failing for years – but GM, now that’s big. Also big is the change in the dealer network for all of the car companies – another fundamental reset, as they downsize those networks and your little, local dealer goes the way of the buggy whip store.

There are undoubtedly lots and lots of local stories or stories about smaller industries that are undergoing radical change because of the current recession. Unions are getting smaller, companies are getting smaller or going offshore, good jobs are harder to find for college grads and even harder for high school grads, many national brands are struggling and smaller brands going away – things are changing rapidly and permanently.

So, now our task is to get used to the new normal that we are facing and figure out how to make the best of it. As for me, I’m trying to figure out how to best advise owners who want to sell on how they have to price and prepare their homes for this market. The end is not yet in sight of having to compete in a market that is dominated by foreclosures. Pricing aggressively is a must and having the house in tip-top shape is the best point of differentiation that the home owner can focus upon. Usually I advise against making major investments in the house (remodeling the kitchen or baths for instance) just as you are going to sell it, but doing everything short of a major remodel job is advised in this market. Rather than put $20-30,000 into the house to get it updated, I’d advise owners to just take that off the list price and let the new owners do those projects to suit their own tastes.

It's going to take some getting used to - this new normal - and many will find it hard, if not impossible. Like lots of things in life, you just have to accept that some things change and will never go back to what they were - we all age and none of us gets younger looking (albeit some pay cosmetic surgeons tons of money to try to turn back the aging process), cars get old and fall apart and houses can lose value that's not coming back in our lifetimes. It's the new normal. If you want to see how pervasive this all is, just Google "new normal". There are already lots of Internet sites devoted to this topic; which is, after all, all very normal