Introduction

Are we there yet? Are we there yet? Are we there yet? For real estate professionals these days, listening to our buyers, sellers, friends, and neighbors sounds like taking a road trip with a three year old. Everyone wants to know if we’ve reached the end of this crazy adventure that the market has dealt our way! There are a few things that we need to consider. First, if anyone truly had the answer to that question they would be extremely wealthy as they would be able to time the market perfectly. Second, the complexities of the market make the issue very hard to pin down. The truth of the matter is that the answer is probably not black and white but somewhat grey. Let’s try to examine the history of market and some of the factors that can show us what has happened. Hopefully, we’ll also discover some indicators of what may happen next.

History

First, let’s look at what truly happened over the past few years and determine why we experienced the market shift that we are feeling throughout the economy. This graph (derived from the Volusia County Property Appraiser’s database) shows the average price of qualified sales for residential single family homes in Volusia County from 1970 through the first quarter of 2009. Note that from 1970 through approximately 2000, the home prices grew at a relatively consistent and steady rate. While there were periods of fluctuation, there has been nothing to compare to the price changes of the last several years.

 

Volusia County Sales

Analysis

Interestingly, forecasting the growth from the period of 1970 to 2000 forward throughout 2009 shows that prices have been reduced almost to the point of complete correction. If we had never had the housing boom of 2000 through 2005, prices should have been almost exactly where they are today. Some would speculate that this indicates that we’ve returned to the proper pricing. Realistically, erasing the boom is not as simple as that, there are a few issues that will need to be overcome.

Many homes that were purchased or refinanced during the peak years will end up in foreclosure. As lending institutions continue to acquire these properties and dispose of them very aggressively, prices will continue to be driven down. In most cases, lenders intend to sell as quickly as possible. There are several reasons why they aren’t holding out for the highest possible price. First, they understand that there is substantial cost associated with holding a home. Second, they recognize that as prices decline, they are losing equity very quickly. Third, even as prices begin to stabilize and eventually climb, most lenders have alternatives to single family residences for investing the money based on their own objectives. These factors, coupled with the fact that they have no emotional attachment to the home, will drive the lenders to continue to turn property quickly and provide downward pressure on prices.

In addition, construction during these years has slowed but continues to represent a glut of homes. Many people were buying additional homes as investments possibly with an eye toward a quick resale or with the intention of holding them as a second home and investment. Unfortunately, the reality of today’s economy is that these investments have turned sour and second homes are a luxury that fewer people can afford. As such, they are for sale. When there is an excess of supply and a lack of demand, prices must be driven down.

Another factor to consider is the momentum of the situation. When the market changes so abruptly, buyers can be skittish about returning to it, further reducing demand and reducing the prices that buyers are willing to pay.

Because of these reasons, and others, we’ll continue to see prices fall for the immediate future. However, the news is not all doom and gloom. As prices continue to drop they are reaching prices at which more potential home buyers are able to enter or return to the market. To assist that return to the market, there are several incentives being offered to home buyers. First, interest rates continue to be at historically very low rates. To further support first time homebuyers, there are incentives being provided by the government which includes a 10% credit on purchases up to $80,000.

In addition, if we assume that the growth in price that existed throughout the 1980s and 1990s is the natural rate for housing, then we’re about to see pricing below any that we’ve seen in many buyer’s lifetimes. That would further imply that as a percentage of total household expenditures, we would be unnaturally low. That represents an opportunity for a buyer’s market.

Next Post

In the next post, we’ll look at forward looking indicators as opposed to these trailing indicators and see if we can determine what will happen in the future…