Statistics don't tell the true story
There’s a high level of chat and just as many opinions as to what the current state of the real estate market is. Has it hit bottom yet, is it going to get worse, have things turned around, where are prices going from here, what about new construction, when should I sell, when should I buy and more. Every report seems to contradict the previous report and clarity seems missing. A story comes out and people say, well that isn’t what I’m seeing, it’s better or worse here.
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A most interesting article from CNN Money saying the statistics don’t tell the true story. I can’t help but then wonder then why we are all so fixated on statistics. This short article is really superb with some outstanding quotes including Jonathan Miller, co-founder of Miller Samuels, a leading real estate appraiser based in Manhattan and author of one of the most authoritative real estate blogs, Matrix.
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Housing market pain not revealed by stats Home sellers are crying but the data doesn't seem to reflect their woes… Please read this very interesting story.
One of the most interesting points made regarded prices. Jonathan Miller points out that a significant portion of the OFHEO index (Office of Federal Housing Enterprise Oversight) "is based on refinanced mortgages, not [solely] on actual market transactions." OFHEO oversees Fannie Mae and Freddie Mac.
With a refi, the price recorded is an appraised value rather than an actual market price and could have been higher (or lower) than what the property would have brought if had it been sold.
An important word about price, whether it is average price or median price. I believe it is getting more irrelevant to analyze pricing trends. While it may be indicative of affordability, the fact of the matter is that people don't buy average homes or a home at the median (the middle price paid on all recorded sales). There are very nice homes in the Charleston area ranging from the low $100 thousands to multi million dollars. If you can afford a home for $150,000, you can buy one even if the median or average price in Charleston is somewhere around $225,000 or $295,000.
Did your home go up or down last year? It only matters if you are selling, if you are living in your home and not using it as an ATM machine, the real value rests with your happiness with your home. During the housing boom of the past few years, the rising value of your home was the number one topic at most cocktail parties. The proliferation of housing value websites is proof that people are fascinated with home values.
Do homes go up and down in value? Of course they do even though lately, we’ve been conditioned to think they would only only go up. If they do go up, are you any wealthier and if they do go down, did you lose money? In this instance, it really is the same as the stock market. Let’s say you bought 100 shares of stock in Google at $200 (lucky you). Now it is somewhere around $500. You are up $300 per share on paper. If you sell today, your profit is $30,000. If you buy Google today, will it go up to $1000 or will it go down to $100 or $200? Or look at the price of oil. Last summer, it traded for $78 a barrel and most predictions had it hitting a $100. Many if not most predicted there was a greater chance of going up to $100 than down to $50 and yet it did come down to $50, settling at about $55 today. What will real estate do and what is your time frame and why are you buying or selling?
If you buy now and plan to sell sometime in the future, no one knows what someone will offer you. If you choose to sell on a day that bad news comes out and everyone is heading to the exit at the same time, the price will be lower, sometimes significantly. That was exactly what happened to the stock market in 1987, the Dow down 500 points and 27% in one day. After the dust settled, it turned out to be a great buying opportunity with some ups and downs but mostly up until the NASDAQ bubble burst in 2000. I believe one of the reasons the media has predicted a housing bubble for at least 3 years is that they completely missed the stock market meltdown of the early 2000’s.
That is what is happening in real estate right now, the bad news reported by the media is driving lots of sellers to put their home up for sale to preserve their profit, and in some cases, sellers who have refinanced and taken so much equity out of their properties that they might even be upside down. Investors and speculators using exotic financing found their payments increasing substantially and have been forced to sell or face foreclosure or bankruptcy.
Buyers are looking at too much inventory and prices are flat at best to falling somewhat. Depending on what part of the country you live in and how “hot” the market was the past few years affects current pricing. Even here in Charleston, it will depend on what part of town you live in. Some parts of the Charleston area might have an 8-10 month supply of inventory while others might have only a 2-4 month supply. Prices will hold up better where supply and demand are more in balance.
Another factor will be your neighborhood. If you live in a relatively new neighborhood, as the builder kept raising prices on newer construction being built, the value of your house went up along with new sales. When sales slowed, the builder had to reduce inventory by offering incentives or reducing the price by $10,000 or $20,000 so some of the “paper” gains on your home have likely evaporated. While your home may have peaked in value sometime in late 2005 or early 2006, it has eased off in price somewhat since.
Why did the value of your home go down? If you are competing with the unsold inventory offered by the builder, the value of your home and the price you ask for it has to reflect today’s market conditions. If your neighbor sold a year ago and your home is identical, it is likely that your house will sell for a little less. One of the problems facing real estate agents is how to convince sellers to face this reality. Some agents will, others will let the seller dictate price just to get the listing even if it won’t sell at that price perhaps hoping to reduce the price later.
My best prognosis for the Charleston real estate market for 2007, unit sales down about 10% from the record volume we’ve experienced the past few years, prices flat to up slightly, fewer new construction starts as the builders rein in and limit their costs and risk. The good news for Charleston real estate, job growth continues to be very strong and a continuing trend of relocation from the colder climates to the South.
In my opinion, this year will offer excellent buying opportunities in the Charleston area because of increased inventory, sluggish appreciation, number of days on market rising and growing loan pressures on borrowers. When bad news abounds and sellers are increasingly “motivated”, it is the best time to buy.
When is the bottom going to occur? Just like in the stock market, they may ring a bell to get the trading day started but they don't ring a bell to tell you it will be a big up day or a big down day. They don't ring the bell to tell you the trend has changed. Homes are still selling. Sellers who price to market are getting offers as buyers are making offers on well priced homes. They are turning away from unrealistic asking prices on homes sitting unsold on the market for many months or even a year. Even if you don't buy at the absolute bottom or sell at the absolute top, your home can still be your castle.
Christine Forgione at NY Houses 4 Sale describes 2 perceptions of the current real estate market with her recent post. Please read I am not babbling and “IT” is not busting.
Athol Kay at The Real Estate Guide make some excellent points in his recent post. Please read, Don’t try to time the market.