Timing the bottom of the housing market. You might as well go to Vegas. The odds there are probably as good or better than one’s chances to “time” the bottom of the real estate market.
When will we reach “bottom”? Finding a consistent definition of “bottom” is a challenge in its own right. Who knows?
A few thoughts on Charlottesville’s market:
– Existing inventory needs to be reduced.
– Housing starts need to slow down (they are).
– Mortgage rates need to stay low (they are).
– A builder or two may need to merge with another.
– Buyers, sellers, Realtors, et. al. need to look beyond the headlines.
Any way you look at the above numbers, sales are down … but prices, year-over-year, are up.*
Sales in Charlottesville/Albemarle:
– Were down in September 22%.
– Year over year, cumulative sales were down 20%.
The number of new listings put on the market in September was down 24%. This is a great indicator. Sales down 22%, but new listings were down almost by the same amount – could this be the sign that people are looking for? (We’ll know in 18 months)
Bank of America is exiting the wholesale mortgage business.
Nourel Roubini is among the greatest advocates for the “sky is falling” perspective (backed by fundamentals)
The bubble blog describes the “crash”
But … when it all shakes out, one thing will remain the same – Real Estate Is LOCAL.
When an agency like NAR or HUD issues a press release about real estate, it does so with a spreadsheet and a bevy of easy-to-regurgitate statistics. All reporters have to do, therefore, is cite the statistics, talk to a few industry people, and spit out the national story. That’s one reason why we see so much coverage.
But real estate is not a national story, folks. It’s highly, highly local.
To beat the point home, when you buy your next home, it won’t be a home that exists in all 50 states. It will be a home that exists in one state, in one town, in one neighborhood, on one street and that has its own character and economics.
And that’s why, in many if not most cases, reading your local real estate blogs will frequently bring better, more applicable analysis.
*Days on Market clearly is inaccurate, and I don’t know why.
Update 10/28/2007: Bumped because of the comments.
Technorati Tags: albemarle, charlalbemarle, charlottesville
We have a friend who describes the market in some places in Connecticut as the worst since the Depression. Another friend in Ann Arbor, Michigan will be lucky to break even on his 5-yr old house.
Here in Vermont we have a contract on our home without putting it on the market, for just slightly under our asking price. Vermont is a a bit different than other places in many other ways, to be sure, but our experience certainly seems to support the assertion that “real estate is local”.
I think you are right: all real estate is local, however, much of what drove the recent bubble – and the Charlottesville metro area was affected by the bubble as much as many other places – is the flood of easy credit for folks at all income levels. That is a national, not local, phenomenon, and the tightening of credit will have local repercussions, even if our local employment numbers aren’t affected in the same way areas like Florida or SoCal are due to housing sector employment declines.
Without the prevalence of easy lending, the C’ville area, which is pretty pricey relative to incomes, remains unaffordable for most families. Unless we continue to import outside wealth – people who make their money elsewhere – the tightening of credit will reduce the ability of lower income borrowers to reach current price levels.
So, I’m not sure what you really mean by a bottom: a new plateau or equilibrium in listings vs. sales which really means a new local minimum in transaction rates, or a new local minimum/plateau in nominal dollar prices?
Inventory numbers may be stabilizing – but foreclosures are rising here as elsewhere, and the bulk of ARM resets hasn’t hit yet – so I wouldn’t count on this for the long range. Purchases have to pick back up though, if the number of listings done come back up, and it’s not clear where the buyers – buyers who can actually get a mortgage, that is – are going to come from.
Transaction volume, without new qualified buyers, is likely to remain low, if not declining.
If 100% financing goes away – and it looks like the big financial institutions have only begun the process of working out their future lending practices, so it’s too early to say for sure that downpayments aren’t coming back, buyers will be scarce. That means that sellers who hold onto their prices (a nominal dollar price ‘bottom’) will be on the market for a longer time.
What I think is going to happen is that transaction volume will dry up until inflation catches up with nominal dollar prices.
My prediction is fairly sticky prices around here – unless and until bankruptcies and foreclosures spike – but very little turnover. At least until inflation catches up with nominal prices – like 5 years from now. If we see higher default rates, then there will be forced price reductions. I don’t have a good sense of the degree to which folks are leveraged here, but HUD has some interesting numbers suggesting that in ’04-’06 the local market was seeing 25% overvaluation gains in each year. Wages didn’t rise that fast – that suggests that the price gains were achieved with a lot of leverage. The infamous WSJ ARM exposure charts show that our local area is significantly exposed (>10% Option ARMs).
Jim — As you note, inventory is up but prices are stable (although the price data is suspect, b/c many of the goodies that sellers — especially of new homes — are providing (like upgrades and paying all interest for some period) are not reflected in the price reported, even though they certainly do lower the real price paid).
In any event, the relationship between inventory — which is growing significantly — and price doesn’t bode well. Houses aren’t selling at the inflated prices sellers are demanding. Sellers can afford to wait — at least for awhile. But over time the market tends to become un-stuck as people are forced to move by job change, divorce or marriage, financial problems, etc. Prices may not drop quickly, but they will drop. And because the market doesn’t adjust quickly, the period of pain may be prolonged.
In any event, unlike you, I take no comfort in today’s price data. Prices have far outstripped wage growth in this area. They are coming down. The only question is how far and how fast. I think by 20% or more — and increasingly I’m thinking more. That doesn’t mean that *nominal* prices drop by 20%. That means a *real* price drop of 20% or more — i.e., prices accounting for inflation. We could get such a real price drop if nominal prices stay flat for 7 years, which could happen.
One other point — you say that “all real estate is local”. Generally, I agree with that, but I think it doesn’t apply fully to our current situation. We have a big run-up in house prices that has been sparked, in large part, by a national financing bubble. In the past 7 years or so, lots of people have qualified for loans they had no realistic hope of re-paying. And then there are many who will not default, but who have qualified for loans that leave them far less discretionary income that would have been thought acceptable under traditional lending standards. These folks won’t be out of a house, necessarily, but their consumption will be restrained for years to come.
So, we have a collapsing national home financing bubble — witness the huge losses that Merrill reported yesterday. And we have significant economic drag imposed by people who have spent too much on housing cutting back on other consumption.
The result? Maybe a recession. Certainly a national downward pull on housing prices.
AC
Jim — one additional note — as you state, the number of new listings is down. That’s likely because people know they won’t sell at the price they want. The decision *not* to list is the first sign that sellers’ psychology is shifting. Before it was still in boom-mode — they were listing and expecting to sell at boom prices. Now, they still want the boom price but know they won’t get it, so they decide to wait. The next step — and the point at which prices really start to drop — is when they resign themselves to the fact that the boom price is gone. At that point, listings will rise again, and listing prices will drop. And at that point we’ll face a very interesting question — will the price drop be enough to begin to reduce inventory?
AC
i dont know why ppl like to struggle with life living in those high cost areas. NC has a lot of nice places to live….bigger homes for half the price of their homes
Vegas isn’t doing so well in their real estate market either. So if by “going to Vegas” you meant gambling at the Casinos? I expect you’d have a fair amount of competition from the locals there.
TrvlnMn –
Thanks for the plug on cvillenews.
I was actually thinking about the analogy two ways –
1) either could be looked at as a crapshoot.
2) there are so many intangibles and unknowns that the risk is sometimes hard to quantify. For instance, how can I make a sound bet on a game if I question the motivation of the athletes? What if they really don’t want to win?
AC –
I’m glad you comment here. I responded to your comments in yesterday’s post.