March 14th, 2012
The news in the housing market is almost universally good these days. Closed sales in Dane County are up about 9% from last year, which may seem modest at first blush. But don’t let that fool you. Offers to purchase reported so far are up nearly 40% over last year, and up over 50% in February alone. Prices are holding steady, but inventories are dropping, down about 7% from last year, and according to the MLS, sit at the lowest overall level we’ve seen since February of 2005. We have a real sense of momentum building, with agents reporting being as busy as they’ve been in years.
What’s behind the renaissance? Plenty of influences are contributing. Certainly record low interest rates have a role to play, and buyers seem very aware of the opportunity. But to our eye, there’s more. Probably most important is the renewed confidence buyers seem to have. The fear that seems to have gripped consumers for the last four or five years has dissipated. The macro-economic news is largely positive; the employment picture is improving, Europe seems to be slowly getting its act together, recession fears are receding. Potential buyers seem less fearful of losing their jobs, and more focused on the opportunities at hand. In short, we’ve finally had the psychological turn we’ve been looking for. Now it’s a matter of time before the rest of the excess inventory is absorbed, and we should be on our way.
What do you think is behind the turnaround? Is it the forces I’ve mentioned, or are there others? What’s your outlook for the future? Let us know…we love to hear from our readers!
December 5th, 2011
It’s December 1, 2011. Another tumultuous year is drawing to a close. By this time of year, we know with 99% precision how the year is going to end up. We also can start to get a feeling, based on current offer activity over the past few months, how 2012 is going to look, or at least how it’s going to start out. So from that vantage point, let’s take a moment to assess where we are, where it looks like we’re going, and what the possible influences, both good and bad, are likely to be for South Central Wisconsin housing in the coming year.
For the record, 2011 marks the sixth consecutive “down” year for housing sales in Dane County (I’ll use Dane County as a proxy for the entire region, as it’s the main driver, and the data is the deepest and most meaningful of the counties in the area), based on the number of sales. The peak occurred in 2005, with 8040 residential sales reported to the MLS. Since then, the totals have been 7181 in 2006 (still darn good, particularly in hindsight), 6746 in 2007 (the first year we really knew something was amiss), 5333 in 2008 (the year things really came to a head), 5485 in 2009 (the first tax credit year, up slightly only for that reason), and 4935 in 2010 (tax credit now expired). While November of 2011 data is not fully in yet, we’ll be a little over 4300 sales for the year to date with one month remaining. We’ll finish the year somewhere between 4600 and 4700 sales for the entire year, down another 5% or so from the previous year. So, is the trend further down, or are we about to turn up?
In truth, the answer isn’t totally clear, but the feel is definitely “up.” 2011 is the first year since 2006 that wasn’t influenced by a major outside distortion, be it the sub-prime crash and credit crunch (with major events in the falls of 2007 and 2008), or the tax credit (spring of 2009 through June 2010). 2010 may have been the most distorted year of all, with wildly different first and second halves as a result the tax credit which expired mid-year. There were 4935 sales in 2010 overall. But the second half of 2010, after the credit expired, was the worst 6 month period by far, with only 1882 sales. Had that been the pace for the entire year, we’d have only had 3700 sales in 2010. 2011, by contrast, has been remarkably consistent throughout the year, pointing to about 4700 sales pretty much month by month. So while the full year 2011 won’t quite match 2010, it’s way better than a year ago at this time, without stimulus or outside influence. While we don’t think this is the best we can do, it at least appears to be a “base” type year, a year when we settled in after years of distortion. We can certainly do better, but it seems unlikely that we’ll do worse. It’s where we are, and the direction is likely “up” from here.
The reasons for optimism are many. For starters, the most recent issue of “The Economist” carried an article on the state of housing markets around the world. According to their analysis, housing prices in the United States are between 8 and 22% undervalued when compared to median incomes and rents. Furthermore, interest rates remain at all time lows. This means that buyers who buy today will be locking in once in a generation low overall costs of ownership. Locally, our rental vacancy rates are the lowest on record, and rents are rising, making ownership increasingly attractive when compared to leasing. The economy is also showing positive signs. Consumer confidence is up. The Black Friday/Cyber Monday Christmas shopping numbers came in well ahead of expectations. The stock market, while still volatile, has been on an upward move lately on optimism regarding the European debt problems and overall better than forecast activity in the US.
But all is not sunny. There are headwinds too, some of which will take time to work through. Primary among them is that inventories remain too high. We’ve discussed this at length in our “Market Source Newsletter,” which can be found on our web site at www.starkhomes.com. High inventories are keeping prices from rising (although they’re not falling either), and lengthening marketing time for sellers. Financing remains way too tight, keeping some from qualifying who should be able to buy, and making the process of applying for a loan unnecessarily burdensome. Because prices have been flat for so long, many current owners have not built the equity they feel they need to buy a “move-up” home. Some buyers believe (mistakenly) that prices have much further to fall, and are sitting on the sidelines waiting. And unemployment, while not much of a problem in Dane County, remains a worry for some, contributing to an overall lack of confidence that is holding everything back.
On balance, when we add all the pluses and minuses together, we still think the direction is up. We think so because the headwinds, while significant, have been with us now for 4-5 years, while the positives are relatively new. We did what we did in 2011 with all the negatives well in place, and while the economy has a long way to go, it’s getting better, not worse. As the economy continues to improve, so should the housing market. This year was better than the second half of 2010, so the direction is positive. Our best guess is that activity in 2012 will be 5% or so better than in 2011. As the market improves, the headwinds will abate. It feels as though the healing has begun.
We’ll keep you informed as the spring market opens in 2012. If we see continued improvement in the first half of the year, we’ll feel confident that the recovery has begun. It’s been a long time coming. Let’s hope this time it’s for real.
September 14th, 2011
A couple weeks ago, my friend Steve Hird from Morgan Stanley sent me a white paper from Morgan Stanley Research, which they titled “REBUILD”. Click here to view the whitepaper. It represents what I think is one of the most intelligent, and probably effective, ideas for getting the housing market going that I’ve seen in quite some time. I like it because, naturally, it dovetails nicely with thoughts I’ve had about what continues to ail the housing markets, and by extension the entire economy. To wit, it focuses squarely on what I believe to be THE remaining problem in housing, namely, continued high inventories, created in large part by an overhang in distressed inventory that has been present since the current economic difficulties began, but has not been addressed or dealt with in any meaningful way.
If we think back on the history of the financial “crisis,” it all began back in 2007 and 2008 with the collapse of the sub-prime mortgage bubble. In the first half of the last decade, housing policy, and mortgage underwriting standards, went horribly awry. Way too much credit was extended to borrowers who could not afford it, and too many homes were built for them to buy. Prices escalated in many markets (not so much here in South Central Wisconsin) to levels that made long term homeownership unaffordable. When it became clear that many borrowers were going to be unable to make their payments over the long term, the bubble reversed itself (as they always do), and prices returned over the next couple years to where they are today, which is at or perhaps even slightly below their fundamental economic value. And yet, with prices back at reasonable levels, the market is still behaving sluggishly. Why is that?
The answer, it seems to me, is obvious: there is still too much “distressed” inventory on the market, in the form of properties where the home is now worth less than is owed against it (short sale), the owners are in arrears in their payments, or the property has been taken back by the bank and is looking for a new owner. This inventory is on the market not because the owner wants it to be there, but because it has to be there. With more inventory on the market than normal, supply and demand continues to favor the buyer, and they continue to try to negotiate favorable prices. Plus, distressed inventory, particularly that already owned by a bank, often sells at prices well below more arm’s length “non-distressed” sales, sometimes because the seller is desperate, sometimes because the bank merely needs to get out of it what is owed against it. One way or another, too much inventory leads to flat or falling prices over the short term. And, because real estate is an illiquid asset anyway, and is almost always owned with leverage (purchased with borrowed money), falling real estate prices are a disaster for the banking system and the overall economy. The proof of that is easily seen in the current environment.
So, why haven’t the markets cleared? On a simple level, when buyers believe that prices will fall further, they wait to purchase. Even if they might get a great deal today, many wait to see if they can get an even better deal tomorrow. This leads to a self-fulfilling prophecy. Prices fall, buyers wait for the “bottom”, demand stagnates, prices fall further. It’s a viscous cycle that’s hard to break. Reducing inventories would even out supply and demand, increasing buyer urgency, and stemming the fall in prices. But in this economy, there’s a further influence at work.
At the height of the bubble, the home ownership rate approached 70%. Since the bubble popped, the home ownership rate has returned to more normal historical levels. But we now have a mismatch. Too many homes were built, for buyers who now can’t afford them. But those owners still need a place to live. In macro-economic terms, the answer is obvious. People who cannot afford to be owners will ultimately become renters. But we still need to find someone to own the excess real estate. That means facilitating the sale of as much of this excess inventory as we can, as quickly as we can, to investors who will operate the properties as rentals.
This is exactly the approach recommended in the “REBUILD” paper by Morgan Stanley, and I think it deserves serious consideration. There are certainly some roadblocks to implementation, and the paper acknowledges that. But there is a precedent for this idea. During the savings and loan meltdown in the late 1980’s, an organization called the Resolution Trust Corporation (RTC) was formed to do pretty much exactly this. It worked well, and the market recovered in less time, with far less damage. While there are certainly differences between the 1980’s and today in both the scope and nature of the problem, the fundamental issue is the same…too much real estate in foreclosure, which was weighing down the whole economy. If it worked then, there could well be a way to do something similar today. At the very least, loosening current over-tight lending regulations to allow more investors to step in and buy excess inventory seems to be something that must be done. Until the market clears, the real estate market will underperform. The sooner we facilitate that clearing, the faster the whole economy will improve.
From a policy making perspective, it seems to me that our leaders in Washington have been focusing on the wrong things. I recently heard PIMCO Economist Mohamed El-Erian on the radio making an interesting point in this regard. The current economic problems are structural, not cyclical, said El-Erian. What he means by this is that “stimulus” measures to increase demand, a standard tool in cyclical recessions, won’t work. Our economy is recalibrating to a new structure, and until that process is complete, conditions will be difficult. From where we sit, the single largest “structural” issue that is holding our economy back is the badly distorted housing market. Until that problem is addressed, our economy will suffer. The Morgan Stanley REBUILD approach is a place to start. Read the paper and see what you think. If we can get our leaders focused on the real problem, we might start to make some headway.
July 2nd, 2011
It’s July 1, the 4th of July weekend starts today, and the first half of 2011 is now in the books. This would seem to be a good time to take stock of where we are, at the midpoint in another tumultuous year in real estate.
In my last post, I suggested that there is something of a “perception gap” between the actual state of the market, and people’s perception of it. In the post before that, I suggested that activity was beginning to pick up, based on the pace of offers in May and early June. I’ve gotten quite a bit of feedback on those two posts, generally divided into two camps. Those looking for any sign of good news were pleased that I was able to find some. Those of a more cynical mind told me I must be dreaming. In a sense, both the optimists and pessimists were right. To understand how this can be so, and how I can defend myself while acknowledging the naysayer’s point of view, requires a discussion of the distinction between the fundamentals of real estate ownership, and the technical state of the market right now.
In “The Perception Gap,” we discussed how difficult it is for the average consumer to get sophisticated information that goes beyond the simple headline. This has been a problem for years, really going back to the beginning of the “housing bubble,” as media stories fanned mania going up, and fear going down. This continues to be a defining problem in the housing industry, as fear, confusion, and the resulting reluctance to commit are by far the biggest obstacles between us and a healthy market. The cynics would say people are right to be afraid, given the continued news regarding distressed sales, high inventories, and the threat of continued falling prices. And yet, here I come, telling people housing is a great buy? How do I reconcile these competing visions of the present?
Let me be clear about something: I have never said that today’s real estate market is operating at peak efficiency. Far from it. We continue to battle high inventories, stagnant prices, and a hugely overzealous regulatory environment that seems intent on snuffing out the mortgage market once and for all. The pace of sales remains about 20% below normal by our estimates, and new construction is still at a standstill.
So what’s right with this picture? If you read my writings carefully, I haven’t said the market is functioning well since 2006. What I have said is that based on the fundamentals of housing as an investment, real estate is one of the best bargains among all the asset classes available today, and on this point, many national observers agree. For people who want to enter the housing market, today’s continued record low interest rates, ample selection, and reasonable prices make housing a great buy. But why not rent, you say? I’m afraid to buy…prices might go down. Yes, they might, over the short run, by which I mean over the next couple years. But that will not be because housing is fundamentally overvalued. It will be because we simply have too much supply for today’s demand to absorb, so the supply/demand equation favors lower prices (although it’s far from clear if they’ll go down any more here, and if so, by how much). But remember, housing’s intrinsic value is based on two things: the cost to build it, and the rental stream it creates. And compared to renting, housing is becoming an even better buy as time goes on.
Just recently, I’ve spoken with a number of professionals in the residential rental market, and they all say the same thing: local rents are going up, and vacancies are going down. This mirrors what’s going on in many markets around the country, where economists say the cost of owing compared to renting is the best it’s been in history. Remember, just because you don’t own a house doesn’t mean you don’t have housing cost. You either pay rent, or you pay a mortgage (if you have one…many long time homeowners are now free and clear), and as time goes on, the cost to own goes down as rent goes up. So for those with a long term perspective, which is what all home owners should have, this is opportunity time. As long as people live in man-made structures (as opposed to caves, woods or fields), housing will have intrinsic value. The market for housing right now is compromised. The fundamental value of housing is not.
How long it will take us to work our way through the brambles of the current market, no one can say. Now that the last of the tax credit months are behind us, we see that over the last 12 months, Dane County sales occurred at a pace down about 10-15% from 2010. Despite some optimistic offer activity in May, we don’t see a big improvement in that pace over the balance of this year. It will probably be a year or two before all the distressed sales clear the market. But they will clear eventually, and the pace of sales will return to normal, as will inventories. Rates will eventually rise. And the cost of owning will slowly go up.
That’s why we remain bullish on housing. It’s too fundamental to our lives to lose its inherent value. As we head into the second half of the year, sales will start to show year over year increases, small at first, but slowly improving. The clouds will eventually lift. And when they do, if you’re already an owner with a housing payment you’re comfortable with, you’ll be sitting in very nice shape.
Happy 4th of July!
June 15th, 2011
In my last post, I discussed the improvement in accepted offer activity in our market since mid-April, contrasting that with the publishing of the Case Shiller Index for the first quarter of 2011, which reported a continued drop in housing prices in the 20 cities Case Shiller studies (ours is not one of them). My primary thesis was that the current headlines were not only 60-90 days behind the curve, but that today’s market was also showing signs of life that if continued, could start to reverse the very problems the headlines were reporting. Since then, we’ve been happy to see a sizeable string of feature articles written in various media making different versions of the same point: that despite the gloomy headlines, housing is fundamentally poised at a very advantageous place, and that today’s news may be misleading consumers about the true state of housing. A link to one of the best of these we’ve seen recently, from the Wall Street Journal, is below.
There is no doubt that today’s potential homebuyer (or current home owner, for that matter) is mightily confused. There’s a great deal of contradictory information in the media right now, much of it not particularly well informed, or relatively shallow and incomplete. Part of the problem is that most of the more thoughtful articles referred to above are published in specialty media such as business oriented periodicals, web sites, or blogs (like this one), and as such require effort and interest on the part of the reader to search out, read in their entirety, and understand. The daily media, however, is more widely seen and read, tends to come to the consumer whether they ask for it or not, and usually just reports a headline or statistic that is attention grabbing. When the headline is negative, like the Case Shiller release, the media widely reports it, finds a few people to give them an ominous sound bite or quote, and moves on. Hence the overriding feeling most consumers have that everything about the housing market is negative, even when much of the sophisticated analysis about housing is hugely positive.
This “perception gap” is perhaps the single biggest obstacle standing between us and a robust housing recovery, and by extension, a robust overall economic recovery. The Wall Street Journal article we link to above makes the point very well. Overall affordability is at an all time high, interest rates are low, demographics are favorable, household formations are on the increase. Their overriding point: it’s unlikely that the conditions for buying will improve much if at all by waiting, and if you’re thinking about buying, now is probably the best time to start. Even if prices fall, they could be offset by rising interest rates. If this isn’t the absolute bottom, it’s darn close, and no one has yet perfected the technique for calling the bottom with certainty. The bigger point: the fundamentals of housing today are the best they’ve been in a generation, and housing should always be bought based on fundamentals.
This is not to say that all is well, or the best that it can be. As we pointed out last time, inventories are still high, new construction is very low, and the lending environment remains overly restrictive and difficult. Qualified buyers will eventually get the loan they need, but the process they’re being put through today is unnecessarily stressful. Prices will not start back up until inventories decline, and buyers should not expect a return to the days of 5-10% appreciation per year (see our “Changing the Conversation About Real Estate series in previous blog posts for an explanation of why this is really a good thing). The market is still healing from a period of overreach, and that will take some time. But it seems to us that the healing is finally under way (after being delayed a year and a half by the ill conceived tax credit program). Remember, everyone needs to live someplace, and that means real estate will remain a fundamentally valuable asset over the long haul.
Toward the end of the Wall Street Journal article, the author discusses the psychology of the market. People were frightened by what happened in the housing market over the past 5 years, and that fear remains. That it’s continued for this long, in relation to an asset that historically has been one of the safest and most reliable long term assets a person can hold, is a powerful testament to the confusion today’s buyers are experiencing. This is the Perception Gap, and it’s human nature that once confidence is shaken, it can take a long time to rebuild. All we can do is continue to point out the facts, with the knowledge that eventually, markets always return to balance, and the housing market is on its way to doing that now. So, if you’re thinking about getting into the housing market, seek out the articles like the one above, or the Fortune Magazine article from last April. There are plenty of them out there. Focus on the fundamentals, not on short term fluctuations, which should ultimately be irrelevant to a real estate purchase. This phase will pass. The transition is already underway.
June 2nd, 2011
It’s been a while since I’ve posted, but yesterday’s release of my beloved S&P Case Shiller Index motivated me to get back on the horse. Specifically, yesterday’s release, which measured a 3.6% drop in home prices nationwide over the past year, is being reported as heralding the final coming of the long predicted “double dip” in the housing market. As the S&P press release stated, “’This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation… Home prices continue on their downward spiral with no relief in sight.’ says David M. Blitzer, Chairman of the Index Committee at S&P Indices.”
Regular readers of my blog posts and our Stark Company Market Source Newsletter know that I am not a fan of the Case Shiller Index. Or, more accurately, I should say that I’m not a fan of all the attention the index receives in the media. The problem is that the index mainly measures activity in 20 cities around the country, none of which are in Wisconsin, and most of which are in the states that were hardest hit by the housing recession. This time, however, my main concern is slightly different. The “double dip” that everyone is focusing on was not only predictable, it appears to us to already be over, at least here in South Central Wisconsin. Let me explain.
First, the “double dip” was predictable, not because housing has new fundamental problems, but because the expiration of last year’s federal home buyer tax credit left a gaping vacuum in the market that is only now starting to fill back in. How big was the vacuum? In 2010, there were just under 5000 residential closings in Dane County, but the year was a tale of two halves. The tax credit expired on June 30, 2010, and in the 12 months that ended then, there were over 6000 transactions. Since then, transactions have been closing at a rate of only about 4000 per year. With artificially stimulated demand in the first half of last year, prices started to rise. When the wave headed back out to sea in the second half of last year, prices naturally weakened. What’s frustrating about the current media narrative is that it implies a new wave of trouble. What’s really going on is a market struggling in the short run to find balance in the face of severe artificial distortions. The variations are technical and short term in nature, not fundamental. Once the market has a chance to find its real level, without distortion, this up and down price behavior will quickly level out. Which brings us to why we think this is already old news.
With over a year of tax credit stimulation, it has (again predictably) taken about a year to “pay back” the transactions that were brought forward by the credit. While 2011 started on a cautious note, with a particularly weak February, we’ve noticed a dramatic uptick in offer activity since the end of April. While it will still be a month or two before this activity shows up in the closing statistics, It’s safe to say that with May offers to purchase, we’re seeing a return to levels of activity that are sustainable, real, and sufficient, if they continue, to start to put a dent in our inventories and get us moving forward once again. While we realize that one month does not make a market, showing and internet activity continue to run at a healthy pace, suggesting that offer activity will remain well ahead of last year at this time going forward. While closings will still look bad this year in May and June by comparison to last year’s stimulated results, once we get to July, we think people will be somewhat shocked by the magnitude of the turnaround. And from there, we’ll see where things go.
One last comment on housing’s “double dip.” We’ve maintained consistently that despite what Case Shiller says, our prices in South Central Wisconsin have remained solid. For the 12 months ended May 31, our median residential price in Dane County stands at $210,000. It peaked in December of 2007 at $218,000. It never dipped lower than $200,000, and has actually risen since June of last year. Are there properties that have lost more value than that? Yes. But taken as a whole, our market remains very steady by comparison to the markets measured by Case Shiller.
So am I saying that we’re totally out of the woods? Of course not. Our inventories remain elevated, foreclosures and short sales are still a larger feature than they will be a few years from now, and I’m not calling for big price increases any time soon. But an accelerating pace of sales will inexorably start to bring inventories down again, and that’s the first step in getting the market back on solid ground. What I’m most definitely NOT seeing is a market where prices are on a “downward spiral with no relief in sight.” On the contrary, what we’re seeing is a market where relief may be right around the corner. If offers continue at a today’s pace through the summer and into the fall, 2012 could be a very nice year indeed for real estate in South Central Wisconsin.
April 6th, 2011
While the numbers are not yet final, it appears that 2011 is off to a predictable, although somewhat uneven and confusing, start. As of April 5, 2011, the MLS had reported 545 residential sales in Dane County for the first three months of the year. This is down sharply from 839 a year ago, but this was fully expected. We look forward to the day when we don’t have to disclaim every sales announcement with the reminder that “last year at this time, the federal home buyer tax credit was still in effect.” Unfortunately, we will have to continue that disclaimer for one more quarter. So, for that reason, we knew sales would lag last year by a considerable amount, and so they have. This will continue until June 30, when last year’s credit expired. After that, we expect sales activity to exceed last year by a sizeable amount, as the falloff in July after the credit expired was substantial. Until then, get used to the “last year at this time” reminder.
The good news is that that it appears the first quarter of 2011 will exceed sales for the first quarter of 2009, before the first tax credit took effect. The 545 sales so far this year compare to 506 in the first quarter of 2009, and it’s likely that we could add 20 or 30 more before it’s all done this year. So, in comparing two years when the credit was not in effect, this year is showing a little improvement. Whether this will continue into the second quarter remains to be seen, as so far this year offer activity has been inconsistent. January was reasonably good, but February and the first part of March were disappointments. However, things seem to be picking up again, and it appears offer activity in April and May have a chance to be fairly strong. If that indeed happens, we could finally be on our way back to normal once again.
What’s normal? While it’s hard to define precisely, we think it will look something like this. Last year, there were 4935 residential sales in Dane County. In the peak year of 2005, there were over 8000. Based on our population and the number of housing units we have, we think somewhere in the neighborhood of 6000-6500 sales is probably normal for us. Inventories will be smaller by about 10-20%, and there will be about 5-6 months of inventory on the market at the normal pace of sales. We have a way to go before we get there, and we don’t expect to get there in 2011. Since the credit expired last year, the sales pace has been even a little lower than 2010, but that looks as though it will slowly improve as the year goes on. When it’s done, we think 2011 will look much like 2010. After that, we’ll start moving up, and we might hit 6000 sales in 2013 or 14. This is all guesswork, and much could change, but it looks conservative and reachable based on what we see now.
In our next post, we’ll look at some of the obstacles that remain for us to get over, and some suggestions on how they might be overcome. In the meantime, it’s still a real buyer’s market, and we’ve seen a lot of happy homebuyers recently. If you want to become one of them, now is the time!
March 7th, 2011
In last month’s post, we pointed out that new listings to the market were down substantially from the previous year. Well, the trend has continued through February, setting a pattern that we hope will bring benefits to our market down the road.
For the first two months of 2011, new single family listings in Dane County are down 27%, from 1472 to 1078. New condo listings are down 31%, from 528 to 364. Normally, we see a sizeable seasonal increase in listing inventory in the first quarter of each year, as sellers position themselves for the spring selling season. This year, that hasn’t happened. Since the first of the year, total inventories have barely budged. Single family inventories stood at about 2400 in mid January. They now stand at 2545. At the end of the first quarter last year, there were over 3000 single family listings on the market, and unless March is a barn burner for new listings, we won’t come close to that number this year. Condos show the same pattern, with current inventories at 1378 compared to 1311 in mid January. A year ago, they were over 1800.
Given the current pace of sales, inventories still haven’t fallen to the point where we have a balanced market. We still have about 8 months of single family inventory, and around 15 months of condos, and inventories will still likely creep up this spring before they head back down. But over the course of the year, the trend seems to be clearly down, and that’s the place we have to start. While we hate to keep referencing last year’s home buyer tax credit, it’s clear in hindsight that the credit induced many sellers to put their homes on the market to see if they could catch the wave. This year, there is no such inducement. So while sellers still need to compete aggressively for the buyers that are out there, the choices for buyers are starting to whittle back down. As the spring market picks up, it will be interesting to see how long it takes for inventories to start to fall again in real terms, and if shortages start to develop. When that happens, as it surely will eventually, prices will start their climb back up.
Sales activity so far this year has remained subdued, and we will continually remind our readers that comparing the first six months of this year to last year will look very bad on paper, since last year’s credit front end loaded activity in a big way, distorting the normal seasonal curve. The political unrest in downtown Madison is probably not helping things, although it’s impossible to tell at this point how much effect it’s really having on those who truly want or need to buy and sell. What we do know is that if inventories continue to decline, the sense of urgency for buyers will start to increase. This year will finally start to give us a true picture of where our market really stands, after two years of tax credit distortions. One thing is for certain: for buyers, this remains an outstanding opportunity to get into home on the best possible terms.
February 3rd, 2011
It’s still early in what promises to be an interesting and important year in real estate, but one rather startling trend has already emerged. For the month of January, new listings to the market in Dane County were down 28.5% from January of 2010. Only 682 new listings have been put on the market in January, compared with 954 a year ago. Sauk and Columbia Counties saw the same phenomenon, although not as pronounced, with 15% and 19% drops respectively.
Readers of our newsletter might recall that last year we were somewhat taken aback by the sudden rise in active inventories in the first quarter of the year. While we never knew for sure exactly why inventories spiked in early 2010, our guess was that the extended tax credit scheduled to expire in April drew sellers in who hoped to take advantage of it. You might recall that the extended credit was made available to current homeowners, not just first time buyers. It never appeared to have nearly the impact that the first time credit did. That said, it’s certainly possible that a larger contingent of current homeowners than we realized put their homes on the market in hopes of snagging a buyer in the rush, and perhaps also getting a credit themselves if they could buy a new home by the deadline. We’ll never know for sure, since every family has its own reasons for moving, but the fact that it happened in conjunction with the tax credit is certainly suspicious.
Analyzing single family and condo separately also makes it clear that single family is where this action is. Since 2006, new condo listings have fallen every year in January, from 550 in 2006 to just 177 in 2011. The drop has been pretty linear (2006 to 2011): 550, 439 ,399, 304, 262, and 177. Single family, however, is where the spike occurred last year. We always see a rush of new inventory at the first of the year, but single family took a dip in 2009, bounced up in 2010, then fell again in 2011. The pattern for single family year by year since 2006 goes like this: 816, 833, 731, 534 (big drop), 692 (big jump), and finally 505 in 2011. This suggests other possible causes. New condo construction has been nil for a few years now, but much of the inventory 5 and more years ago was newly built. Today, we see much less. Single family new construction has also been crimped, but that’s an easier spigot to turn off than condos are, since condos are usually built in large numbers, while single family homes are built one at a time. That might help explain the drop in new single family inventory between 2008 and 2009. But last year’s jump up was a break in the pattern. This year, new single family listings are similar in number to January 2009, when the first tax credit had yet to be implemented. With new construction still pretty low, we have a chance to see inventories really start to fall.
We can speculate all day as to why this happened, but the important question is: is this good, or bad? In looking at the long term health of the market, we think it’s good. Bringing down active inventories is the last remaining piece of the puzzle to getting our market back on solid ground. As you’ll see in our latest edition of the Market Source Newsletter, due out this week, we think a drama free 2011 could be just what the doctor ordered, and all signs point to that being the case. If demand follows a more or less normal seasonal curve, and new inventory remains moderate, we should see overall inventories resume their steady decline as the year goes on, and that will be great news for everybody. As you’ll also see in our next newsletter edition, prices in our market are predicted to return to their “peak” in 2-3 years. If inventories continue to fall, that prediction seems even more likely to come true.
December 28th, 2010
As we come to the end of another tumultuous year in real estate, I’ll indulge in the time honored tradition of musing on what we’ve learned over the past year, and where we’re going in the year upcoming.
In many ways, 2010 was as instructive a lesson in human nature as one could possibly imagine. In the first half of the year, first time home buyers tripped over each other to take advantage of an $8000 tax credit. In the second half of the year, with record low interest rates and affordability, buyers were passive. Why should this be? We’re reminded that fear is always more motivating than desire, and the tax credit had one thing going for it that the current environment doesn’t: a deadline. So, fear of missing out on a freebie overcame fears of buying at the wrong time. While today’s low rates and reasonable prices are more valuable in economic terms than the tax credit was, the lack of a deadline leads to a lack of urgency. That leaves the field open to the fear of the future direction of the market, overcoming the desire to buy at a manifestly favorable time. With an $8000 incentive, it’s great! Without one, ho hum. Nothing else has changed, but the behavior certainly has.
What we’ve learned in 2010 is that human nature is immutable, and to be successful, one must work with it, not against it. We’ve also learned that people still want to own a home, but they need confidence to do it. What we’ve known forever is that markets always seek equilibrium over time, and while the real estate market has not yet found equilibrium, it will. And finally, we know that over time, the demand for housing of all types will continue to grow, since people will always need a place to live. With those truths in mind, here’s how we’re approaching 2011.
One of our core beliefs is that real estate markets are fundamentally built on change more than growth. People move because of changes in their lives, and when the need becomes acute enough, they find a way do it. Over 12,000 families bought or sold homes in Dane, Sauk and Columbia counties in 2010, and somewhere around that many will do so again in 2011. As they do so, they’ll work though the inventories we have, and prices will eventually start back up. Current homeowners will start to come back in greater numbers to move up as they start to believe they can get what they think they need out of their homes again, further increasing demand. Inventories will fall, turnover will increase, and optimism will return. In other words, the market will continue to work its way back to equilibrium, because that’s what they always do.
So will 2011 be a good year? It will be a great year for those who have change in their lives and act on it to their benefit. Human nature being what it is, there will be those who stand pat, waiting to see what happens. Their lives will be put on hold, and it will be their choice. For those who want to move on with their lives, their lives will improve. Because in the end, that’s what real estate is all about…living the kind of life you want to live. Nothing defines that more for us than our homes. If your goal is to improve your life, the best time to do it is always right now.
Happy new year.