May 2009 Newsletter

Finding Bottom: Where the market will turn around

The population growth of the United States will, as it frequently has in the past, snap up all surplus

housing that currently exists in growing regions. When that happens, prices will rise and builders will

have sufficient incentive to return to the market in some, but not all regions. But first, selling prices

must rise to the level that returns the cost of construction and a profit worthy of taking the risk.

America has a lot of problems to solve and only time will tell if we made the right choices. And, while

some of us are totally paralyzed waiting for the next dispatch of really bad news, others must get on

with their plans. The summer buying season is fast approaching and buyers continue to wrestle with

uncertainty.

It’s no secret that qualified potential buyers are sitting on the sidelines waiting for some indication

that real estate prices are at, or near, their bottom. While increasing sales prices are an obvious sign,

buyers who have a strong desire for a wide selection at the best possible prices will need to act before

that occurs.

For many potential buyers, it isn’t so much about getting the lowest possible price as it is feeling secure

that they made a wise investment. If they plan to stay for 10 years, it matters less what happens in the

next two years to sales prices than it does where they spend those two years. There are real and tangible

benefits to owning where one lives. One we keep overlooking is satisfaction. I love my home, and I love

owning it and doing what I want with it.

Even so, most potential buyers will need some assurances that things won’t fall much further. And, their

will be signs. In the fall of 2005, with inventory low and prices at an all time high, I advised listeners of my

radio program that if they intended to cash out, now was the time. I told them that we were short of houses

and they could get top  dollar with a quick sale. While I did not say that we had reached the absolute

summit of sales prices, I knew we were close.

In finding bottom, here are some things to consider:

1. Local employment

One of the factors affecting the selling price of real estate is local employment.  At first, all the talk of the

housing crisis was about over-leveraged consumers. But, we have now moved to a more critical phase.

If you do not have a job and you have little to no savings, you can’t make a mortgage payment, period.

Nor do I believe that housing brought down the economy. It’s the other way around. Housing is benign.

People buy houses, start families, and trade up when they are employed. And, because jobs are

disappearing so fast, even those untouched by job losses are fearful they could be next.

What brought down the economy was fraud. Massive waves of, as yet not fully disclosed, fraud did this to us.

ENRON, WorldCom, AIG, Tyco, Halliburton, Arthur Anderson, Madoff, the legal fraud perpetrated by greedy

CEOs; fraud by their accounting firms, loan fraud by sophisticated organized crime from both in and outside the

country, fraud by elected and appointed officials, and a bunch of garden variety fraud by small timers brought

down the economy. It was a whole sale looting. They got a lot of our money and they burned through our

prosperity, and now we are forced to bail them out. But, this too shall pass.

When the job trend reverses, when we begin to create a few hundred thousand jobs over a few months, an

enormous pent up demand will return to a limited selection of good housing stock. At the moment, one in seven

of the nation’s houses is vacant. Many are in various stages of disrepair, functionally obsolete, or located in

the wrong place.

Unemployment filings will likely continue to fluctuate for a while and are sometimes more indicative of changing

industry dynamics than the actual employment health of a local community. If your region is anticipating stimulus

funds or has modern growth industries that will be developing jobs of the future, your employment picture should

start to improve.

Local communities’ recovery time will vary, reflecting employment conditions. Some will never recover at all.

But, Detroit has been in decline for decades. In the 70’s, so many Detroiters moved to Windsor, Ontario that

Apparently, there is no bottom in Detroit where reports have surfaced of homes selling for as little as a dollar.

there was a common bumper sticker which read, “Will the last person leaving Detroit please turn out the lights.”

Detroit has been losing jobs for a very long time, and the recent woes of the American automobile industry do

not bode well for the future. But, in other places, where contemporary industry is growing, like Seattle-Tacoma

or the Silicon Valley, the bottom is closer.

2. Return to historical baseline of sales

To understand the market dynamic, it is important to understand “normal” for your community. Every month, a

finite number of residential real estate transactions occur. In a down market, the number might be as few as

half the number of sales during a boom market. But over time, it tends to average out.

Determine a monthly baseline of sales for your community. Obtain a history of sales activity for the past ten

years. This will give you a measure that includes sufficient market ups and downs.

In a recovering market, there will be a return to the historical baseline of monthly sales activity.

3. Reduction of available inventory

Just as there are historical baselines for sales activities, there are also similar baselines of available property

offered through builders, the MLS, and occasionally, private sellers. Simply tracking the number of listings

through the MLS will give you a clear picture of the direction of inventory.

Knowing the baseline of sales activity, you can determine how many months of available inventory are currently

in the local market. If inventory is shrinking, the bottom is near.

4. Relationship to cost of new construction

In many communities, sales prices are actually below replacement cost. And, that in itself suggests the bottom

is near. If builders cannot recoup their costs and make a profit commensurate with the risk, they will cease

building until sales prices begin to rise. Recognizing that prices are actually starting to rise and that resale

inventory is shrinking, pent-up demand will pour back into the market and here we go again. Remember, all

the people not buying these days will combine with normal baseline demand and overwhelm the market.

5. Hidden price stabilization

Recent reports of sales prices often seem to assert that these sales prices are representative of the value of

housing in general. First, that’s just what sold that month. Since distressed properties make up much of the

market, it stands to reason that those prices would reflect smaller square footage and a discount equivalent

to the cost of rehabilitation.

Some homes are more desirable than others. What about those homes with extra features or those located

in good school districts? Are their prices holding? If so, your community may be on its way to recovery.

For potential buyers, finding bottom is less important than knowing that it is near. While it is impossible, given

our unprecedented circumstances, for anyone to say for certain when prices will begin to rise in each community,

the buyer who knows the signs of recovery will already be settled into the opportunity of a lifetime. In growing

communities, housing must and will return to the cost of replacement or new construction.

RIS Media

As many of you know, we had our first official meeting at our new board location. We had our ribbon cutting

ceremony through the Chamber of Commerce, and had a great meeting. Thank you to all those who

participated in American Home Week. 

Another benefit that you will receive as members of SVAR, is that you will have the ability to use the conference

room for your personal events at no charge. The board of directors is in the process of getting all the particulars

finalized.

We have a busy month in May. We of course kicked off the new MLS system called Promatch Complete and

had a couple of training sessions on that. I’m sure there will be some growing pains, but it looks to be a lot more

user friendly once you find out where everything is. We have multiple continuing education classes coming up on

the 14^th, 15^th , and 16^th available at a discounted price at the association office. We have our first evening meeting

of the year on the 21^st down at the Emmitt House in Waverly. All the committees are working hard to serve their

membership also. Don’t forget to attend the RPAC auction coming up on June 4^th at the Christopher Conference

Center starting at 5:30. Whether you buy or not, come, eat and have a good time.

Activity seems to be keeping us all busy, so remember work hard, stay positive and enjoy life.

Your Treasurer - Mark Cenci