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I’m having more fun with math than any man should be allowed this morning.
Here is a quick snapshot in chart form of what the Pikes Peak MLS Market looks like in Single-Family Sales terms at Mid-Year.
Now, this is a graph of what the relationship between Supply and Demand looks like at Mid-Year, expressed as Months of Inventory (Total Active Listings Divided by Unit Sales per Previous Month).
How is the market?
I love the question, but have to prep anyone I know that I’m as big a windbag as anyone they’ll ever meet in real estate. I can talk the pros and cons and opportunities and pitfalls like anyone.
For the sake of everyone’s oxygen-supply, I’ve found it’s better to show how the market is rather then tell.
This is Page 2 of the 2011 Annual Report and Forecast.
This page tells everything that is going on in the macro-market. It doesn’t tell you much about what’s going on down the street from your home, but it does tell you what sellers are feeling and what buyers are seeing. This is the pulse of the market.
This page shows four different trends in graph form: Monthly Listing and Sale trends for the last six years; units listed versus units sold for the last six years; months of inventory (sales-rate) for the last six years; and pricing comparisons (all listings, new listings and solds) for the last six years.
As many people know and acknowledge, 2005 was the peak boom year nationally and locally for the real estate market. That is the baseline for comparison for 2010 sold data in all six graphs.
The relationship between monthly listing inventory and monthly sales was most of out whack in Summer 2005 and Winter 2008. The 2005 sales year was characterized by high purchasing and low inventory; 2008 was characterized by high inventory and low purchasing. But in 2009, inventory started to return to more normal levels. Demand picked up. This lead to a more balanced market. This lead to declarations that maybe the end of the slump was at hand (yours truly: guilty).
What few anticipated was the rapid build-up in listing inventory in the first six months of 2010. Inventory increased from just under 4000 to 6000 in less than 180 days. This spike in inventory actually out-paced the massive listing build-ups (on a percentage basis) in 2006 and 2007. Following the expiration of the tax credits June 30th, the lid was coming off of inventory while demand disappeared. July 2010 was the worst summer sales month in decades. It was then eclipsed by August. Quarter 3 sales were off 26.9% from 2009.
The massive drop in Quarter 3 explains why 2010 ended up as the worst performing year for sales in the last decade. Sales began to pick up moderately in November and December, but the four to five month echo behind the expiration of the tax credits radically changed the game. For the year, it was more probable your home listed for sale would not sell, then sell.
Six months is considered a balanced market. That means prices are not likely to go up or down, but stay flat. Less then six months sustained gives pressure to rising prices; over six months gives credibility to falling prices. Again, this is the market as a whole. There are neighborhoods in the $300K’s with 4 months inventory today; there are neighborhoods in the low $200K’s with 10 months inventory today. But 2010 looked more like 2007 and 2008 then 2009 when the year ended with less than six months on the board. It is worth noting that months of inventory has actually declined through the fall into winter on a monthly basis, after peaking at over 10 months in August. But this graph indicates further threats to pricing in 2011.
For my money, this is the craziest graph of them all, and it doesn’t have to do with my color scheme. It’s all lines merging towards some sort of magnetic pole. Since February 2009, average price has steadily increased. Since approximately the same time, new listings coming to market have moderated their expectations. At the start of Summer, 2009, total listing price began to drop. The average list price in the market has dropped by more than 20% in the last 20 months, while average price has risen to 2004/2005 levels again. In the last four months, when listing volume has slackened notably, sellers that are coming on are increasingly coming on in lower price ranges and/or are coming on closer to in-line with price expectations. If you’re looking for a new listing in the $500K’s, keep waiting; not many have hit the market lately. But if you’re hoping that sellers would quit over-pricing their homes, start looking at inventory again. Right now, new to market average asking price and average selling price are identical as 2011 begins.
So what to make of all this?
We’ll keep un-packing the story later this week. This is some of the data. I’d love to make a neat and tidy explanation of all this, but that would be 1.) cheating and 2.) inaccurate. There’s more data to share to complete the picture and generate the forecast.
Jay Thompson, Real Estate Blogging Rockstar has a brilliant (as usual) post today. Jay asked the question “Will the Homebuyer tax credit return? Should it?”
It might surprise some that I don’t think it should. I am for select government intervention. I am for select forms of stimulus. I am for bread on my own table. But I don’t think the tax credit is the right route for aiding the recently sorrowful market.
In our market, the first wave of the credit did draw down inventories beautifully. We had active listing inventories down to a number within 1% of January 1, 2006 on January 1, 2010. But since that time we’ve had a 53% increase in listings. The first wave worked; the 2nd wave created a false excitement / illusion of success that undid all the good of the first wave.
The credit here essentially worked too well. It gave sellers the perception that selling was easy again, or at least getting easy. Because the market had returned to balance (we were at just over 6 months of inventory January 1st) sellers voluntarily came rushing back into the market who had sat on the sideline, that “other shadow inventory”. Some of this was logical: the chance of a seller successfully selling was 47% in 2007 and 2008 in our market. Last year ended at 53.6%. That isn’t a 6.6% gain… that’s a 14% gain in probability. Last year’s uptick in probability of sale must be seen as the motivation behind so many sellers electing to return to the market this year. But now… through July of this year, the odds of a home selling were at only 44%. The tax credit can be applauded for the first improvement and ridiculed for the later developments.
Giving people cash doesn’t help them make good decisions. The savings on a $200,000 loan at 4.25% versus 5.25% are $43,000 over the life of a 30 year loan; in other words, the mortgage market today provides a buying opportunity that is significantly better than last year. The value of 30 year interest savings if 5 times that of the tax credit. The monthly payment difference is 8 – 11% lower now than it was one year ago. There is more inventory to choose from. But it is so much easier for a consumer to think short-term and “get $8000 with tax return”.
One of the major costs of market tinkering is the sacrifice of trust and good will. NAR lobbied relentlessly for the tax credits (including requests for the tax credit to be $15,000, not $8000) and real estate agents and mortgage brokers insisted that rates would skyrocket later this year once the Feds stopped buying treasuries. “Better lock in now, because rates will be at 6% by year’s end” stimulated the March/April rush on the market, the premature buying panic that got people in a.) under the tax credit deadline but also b.) ahead of the presumed upward trend on interest rates. Well rates today are six tenths of a percent LOWER, not higher than they were in the Spring. I tremble to think what future goodwill could be traded for more short-term spikes in sales due to renewed lobbying efforts. It is all reminiscent of “buy now or be priced out of the market forever”, another notorious industry statement from 2005.
A concerted effort among brokers to properly educate their clients and consumers on home-ownership and personal finance WILL NOT remedy the market quickly (because that’s all we’re interested in these days, isn’t it, the quick fix?); but it would go great lengths to helping the market make a durable and sustainable recovery. It would help restore some semblance of professionalism. It would increase the individual broker’s permission asset. We can look to the outside for help… or alternately… we in the biz can be the help ourselves.
Each month when I publish the Stat Pack, I start with “The Rules”. The Rules…don’t…change. Here they are:
LOCATION, LOCATION, LOCATION
MONEY IS MADE ON THE BUY
SELLERS SET ASKING PRICES; BUYERS DETERMINE VALUE
BUYERS BUY VALUE
THOSE WITH POWER HAVE FEW NEEDS. THOSE WITH NEEDS HAVE LITTLE POWER
THE HARDEST THING TO GAIN IS TRUST; THE EASIEST THING TO LOSE IS TRUST
REPUTATION AND ETHICS ARE VALUE-ENHANCING ATTRIBUTES
THE BEST NEGOTIATING POSITION: WINS
A new tax credit doesn’t necessarily violate the rules… but you’re supposed to eat your dinner before your cake, and the tax credit is just the butter-cream icing on top of the cake. Better butter-cream doesn’t make anyone, or anything, any healthier.