Clark
4th Quarter 2011
Market Conditions Worth Noting
How Long Can This Go On?
(With Graphs as Usual)
The question I am asked frequently is, "When will this price slide end?" The short answer is, "We do not see an end in sight." So with that said, let´s take a look at another perspective.
Over 6 months ago I predicted stabilization in prices, and I understand Zillow did the same a few weeks later. We were both obviously wrong. Our predictions were based on several major indicators that suggested prices should stop dropping. These Indicators were discussed in my last newsletter.
Where did I go wrong in my prediction?
I (and perhaps Zillow as well) underestimated how more powerful the downward forces of Foreclosure and Short Sales were over stabilizing forces. Those stabilizing forces are still present today. They are simply weaker than the downward force of Foreclosures and Short Sales. So, if we can underestimate these downward forces then perhaps we might also be underestimating the upward strength of a force that is just now making its presence felt. Let me explain.
The lending rules prevent sellers who have been through a short sale or a foreclosure from borrowing again for about 3 years no matter how good their credit score is. There are many sellers doing short sales who are well employed and with good credit. It has been well over 3 years since this crisis started. Those borrowers that have been waiting for the 3 year mark to pass are now slowly returning to buy homes. With each month that passes, more and more of these eager buyers will purchase. Perhaps this explains why our inventory levels (now at 6.5 months) are at the lowest for a December period since December 2006 when inventory levels were at 4.5 months. Perhaps this explains why our lockbox activity charts show activity levels increasing over 48% the last week in December and over 54% the first week in January.
Below is a look at 4 different homes styles and how their price performed this last quarter.
Ranch homes continued their price slide. Pending sales are at $5 PSF (per square foot) less than recent closed sales, suggesting the slide will continue through at least the middle of February. Oddly, inventory levels for ranch homes dropped from 3.4 to 2.9 months. These are shortage levels. With inventories at these levels, I do not see how prices can drop further. The buyers I am working with now are having major challenges finding their home, as there are few homes to choose from. There was no slowdown in ranch home sales from the prior quarter despite the holiday period.
2 story homes were the only style to show surprising price stability. Inventory levels for 2 story homes are at 4.3 months. I do not expect this to last because the pending prices are $11 PSF less than the current sold prices. Prices will most likely fall at least through the middle of February. There were nearly half as many homes sold this quarter as compared to the prior quarter.
Acreage home prices fell. Pending sales suggest that prices will NOT fall significantly through February. Inventory levels fell to 6 months which is a neutral market condition.
Newer townhomes fell significantly yet the pending sales suggest prices will quickly rebound for at least through February. Inventory levels of townhomes fell dramatically. There is currently only 1.6 months of inventory. This is so low I do not see how prices can go any lower. We rarely reach these low inventory levels even during the boom times of pre-2007. Such conditions would seem to defy the basic laws of supply and demand. If only that law were enforceable.
CONCLUSION
We are very close to the end of our price drops. Predicting when we have reached bottom and when a rise will occur is nearly impossible. I am not the only one that feels this way. The November 26, 2011 copy of the Economist suggests that American homes on average are 8% undervalued based on rents and 22% undervalued based on American incomes. The article states, prices may have reached the floor but that is no guarantee of an immediate rebound. (If world-wide housing price trends interest you then let me know and I will forward it to you.)
If you are a buyer, you can be assured that we are very close to the bottom of home prices and that it could take years for a rise to occur. Also note this: Interest rates may be at the lowest rates we will ever see. Just a 1% increase in the interest rate will be the equivalent of a $20,000 increase in the purchase price as shown in your monthly payment. Unless prices drop another $20,000, you are safest to buy now rather than risk rates moving up. When the industry decides it is time to raise rates, they move very quickly.
If you are a seller, prices may not go down much further. We are very near the bottom. Yet, it most likely will take years before prices rise significantly. If your goal is to sell in the next 5+ years then it may be best for you to wait it out. If your goal is to sell sooner then it is best to sell while interest rates are at their current lows. Once interest rates begin their rise, the first move upward will most likely be a 1% jump in less than a month. Every rise in interest rates means fewer buyers can afford your home.