Since 2007, I have constructed an Annual Report and Forecast for my real estate brokerage. For four years, that was an ERA Shields document. For the last two, I wrote one for Selley Group with my business partner, Hannah Parsons. Part of being a mad scientist of real estate data is perfecting your practice and refining your methodology.
In 2012, we missed on one part of our forecast: appreciation. We only predicted 1.5% to 3% appreciation. For the year, the city ended up climbing 5.8% in average price, and more than 10% in median price. The primary reason for this gain had to do with the surprising drop in interest rates (something else we didn’t forecast… I mean, who outside Ben Bernanke saw 3.4% 30-year fixed mortgages on the horizon last January?), something we didn’t dare forecast.
Here were our bold predictions:
So in 2012, what are we predicting? Appreciation. Not lots of it, but it seems nearly impossible not to happen based on the scarcity of inventory.
In 2012 we are predicting 9000 single family and patio unit sales, and gains in value between 1.5% and 3% appreciation. The 2012 calendar year has debuted with only 5 months of inventory, the lowest experienced since 2005. The low inventory can not be over-estimated. This is now a self-correcting, laissez-faire market where there is very little government intervention to manipulate behavior, and buyers and sellers are self-correcting their real estate problems. The low inventory and less than 6 months inventory (6 months is considered a balanced market) will have a marked effect if buyer activity continues at a steady pace…
The market of durability will actually expand in 2012. A bold prediction we are pretty certain of is that this will be a trickle up recovery, not one fueled by the promise of appreciation, but instead by the promised of higher quality of life. Investors are often seen as the necessary catalyst for a market recovery, but there are plenty of families in their late 20‘‘s to early 40‘s that would love to find “it” for the next couple decades, lay some roots and get after the business of raising a family.
In other words, we nailed other predictions: We predicted just over 9000 single family units closed. The 2012 total: 9146 (missed by 1.1%). We predicted an expansion of the durable marketplace, where buyers would extend their horizon of ownership past ten years due to low interest rates. Despite the expansion we saw coming in the marketplace, we said it would be “kind of a big deal” if there was more than one month that closed more than 900 units, and true enough, only July topped 900 (973). We pointed out that at the turn of the new year, there were homes listed for $40,000 to $50,000 below tax assessment; those disappeared by the end of March. We said that the market had corrected and was now poised for recovery (most people were predicting a positive market correction, but we realized we were past the turn) and that the fuel behind the recovery would not be investors, but primary resident owner-occupants armed with a desire to improve their quality of life.
And we concluded our forecast last year with the statement: “The shrewdness and durability of today’s buyer is exactly the kind of solid footing our country needs to be standing upon.” We didn’t make an appeal to the consumer, to the political machine or to lending institutions. We instead said that the philosophical process of consumer decision-making was durably unraveling the market.
What makes this review so interesting is that consumers are more often than not choosing to buy real estate for quality of life reasons. Some of the new data we are looking at for our 2013 forecast is unraveling what is going on in new construction. New construction permits were up 53% in 2012. Can you see the pattern as to why? Durability. The average consumer wants to own their home 10 to 15 years. If you’re going to own it for 10-15 years, think about the 2028 real estate market and what consumers will demand for resale on that investment… maybe two 95% energy efficient furnaces, 2×6 construction with R-19 to R-25 in the walls, cubic footage more important than square footage, landscaping that is easy to maintain primarily in regards to persistent drought. Now think about the areas that are experiencing success all of a sudden: Flying Horse and Cordera. Here, they heavy HOA dues that were seen as a threat to sale in 2005 and 2006 are actually now a giant benefit because it is the HOA that is maintaining and providing the convenient local open spaces, and the homes that are being built on those lots more often are putting their emphasis into the exterior wrap and thoughtfulness of the cubic foot, rather than massive square foot dressed up with excess features.
One other trend: consumers have always bought benefits, not features, but this is a place where we are seeing a rather cavernous gap in value measurement in the marketplace. The exceedingly tight appraisal standards are still based on a feature-calculation, the objective, easily measured quantifiable approach. But like we said last year, only our dissatisfied clients buy a home off of a spreadsheet. An appraiser might discount $8000 to $10,000 for a home backing to a four-lane road. We think buyers discount it by $25,000 to “I won’t even look at it.” That neighborhood could have an 80% probability of sale, but the home backing to the busy road has a 20% probability of sale. Now place a dollar figure on that. Additionally, if you’re living in a home for 15 years, does a drive-under garage work well with your Costco stock-up ways? Does a sloping hillside really provide valuable privacy, or does it just keep the kids inside when your preference is to have them outside playing? It’s nice to have a great little elementary school nearby, but if you’re buying with an interest rate so low you can readily imagine paying off the loan, what about the middle school and high school? These are the harder to calculate benchmarks, and these are the places of value that we see buyers wrestling with, today.