Median home prices up, inventory up, number of sales way down.
The local real estate market reflected the national trend from 2001 through most of 2005 with sales prices growing at double digit rates. However, when the market entered the typically slow summer months of 2005, it slowed more than usual and has not recovered. The inventory of unsold properties has more than doubled while the number of transactions has dropped precipitously. The seller market of the past is now a strong buyers market.
Why is inventory so high? There are several reasons.
Investors helped drive the upswing in prices. They entered the market with specific goals. Some entered into contracts to build spec homes, believing that prices would continue to accelerate at the same rate. The extended build-time (up to two years recently) contributed to this strategy. Investors thought they could lock in a house/lot package at 2003 prices, paying “interest only” on the construction draws, and selling the completed home two years later for a 50% premium. Many of these homes started coming on the market at the same time that the buyer pool diminished and prices flattened. Having fallen in love with their investment however, many speculators listed their properties based on their original optimistic projection of price escalation. Naturally, in a buyers market, overpriced property sits idle.
Other investors bought existing or newly completed homes planning to rent them. Their strategy was that the rental income would offset most of the carrying costs while the property’s value increased at double digit pace. The increase in available rental units eventually depressed the rental market. In my neighborhood, rentals peaked in 2003 and 2004 but are available today at 2000 rates. Meanwhile, the value of these properties has, on average, doubled. When you have to reduce your rental income to attract renters (if you can find them at all) and pay more for the property, you find yourself in a negative cash flow position. At the same time, the appreciation of property values has slowed. This is a double whammy; less (or no) income to offset the carrying costs of a more expensive property that is not appreciating at the hoped-for rate. Another unanticipated fact is that rental property cannot be homesteaded, Property assessments can (and do) increase at more than the homesteaded rate of 3%, raising taxes. Insurance has also risen substantially.
Much of today’s inventory of “for sale” property is the result of the optimistic decisions of investors. Highly leveraged financing and variable rate mortgages compound the carrying cost problem. Watch for price reductions to more realistic levels, but probably not to “below acquisition cost”.
On the non-investor side, homeowners are not pricing their homes realistically. The overabundance of sales people has increased competition so that anyone can find a real estate salesperson who will take a listing at “above market” price.
Meanwhile, the median price for the sale of existing residential property is up from a year ago. This tells us that people are still willing to pay a little more than last year but they are being much more patient and discerning. No more rush to beat out another bidder. The homes that are selling are the ones that are placed on the market at the right price in the beginning. Note: The right price is not a double digit percentage increase from a year ago.
Has the bubble burst? Not at this time. We aren’t experiencing a downturn in prices as would be expected if a bubble had burst. We’re simply experiencing a significant drop in the number of transactions. Of those properties that are selling, the sales prices are at or above comparable properties a year ago. We have returned to a more rational market. It may take another year or so to sort out the excess inventory or for the market to catch up with over optimistic pricing. I’ve been predicting this for over two years in my newsletters.
In the long term, the demand for