What the Spring Housing Market is Really Doing
You probably saw the headlines a couple of weeks ago when the latest Case-Shiller housing report came out, saying that home prices were down nationwide (yes, the dreaded "double dip!") But at the same time, real estate agents in most parts of the country are reporting a surge in buyer demand this spring - in many instances topping what was experienced a year ago, when the Home Buyer Tax Credit was in full swing.
(All of this despite rising gas prices, chaos in much of the Middle East, and the lingering effects of the earthquake in Japan, all of which should be squelching consumer confidence.)
So, who's right?
As always, in my opinion it pays to go with the experience of people with "boots on the ground." Agents are the ones who feel a surge or decline in the market as it happens, just like a surfer feels the surge and ebb of a rolling wave underneath his feet.
(OK, that's not really me in the photo. But you get the idea. :)
At the end of the day, most housing numbers released to the public provide a picture that's a little bit like the pattern left in the sand after a wave has crashed onto the shore and receded into the ocean. Yes, they do reflect an event that happened, but it's risky to use that information when you're making big financial decisions that rely heavily upon current conditions.
When they say "home sales," what does that mean?
Time and time again you'll see statistics and projections based on "home sales." For example, it's very common to hear that most homes sell during the period of May through mid-summer, which leads many homeowners to think that late spring is an ideal time to list.
Unfortunately, the term "home sales" can create big misconceptions among consumers. Unless it specifically states that the data refer to pending sales (homes that just went under contract), usually "home sales" means homes that have closed. That's when you need to do some quick math to keep yourself on track.
Here's why: Before a home closes it typically spends between 30 and 60 days in "pending" status as it moves towards the closing date. Short sales, in which the seller asks the bank to accept a sales price that is less than the amount required to pay off the mortgage, usually take much longer. It can be weeks or months before you hear from the lienholder whether or not the offer price was accepted in the first place, and then the normal closing process begins.
These days short sales make up one-third to nearly half of all homes closing nationally, so a significant chunk of closed sale data represents homes that buyers made offers on three to six months ago. This means that by the time numbers based on closed home sales are crunched and released, they portray a market that is two to six months old.
Prime example: The Case-Shiller Report
The Case-Shiller housing price report released on April 26 stated that home prices declined in 19 of the 20 monitored markets in February. This was based on a three-month rolling average of closed sales, the most recent being in February, and at least a third of the transactions were short sales.
Once you do the math, it's clear that the home prices in the report primarily reflect offers that were made by buyers in September through December. That's not exactly a snapshot of the 2011 spring market!
(It's actually a reasonable portrayal of the late 2010 market, but good luck finding that caveat in any of the newspaper articles.)
Tip: Always ask yourself, "When were the decisions made that produced the information I'm looking at?"
What's the market doing now?
Home buyer demand seems finally to be recovering - on its own this time, rather than artificially boosted as it was last year by the Home Buyer Tax Credit. Pending home sales (a better reflection of the current market than closed sales) were up an unexpected 5.1 percent in March.
There have definitely been some changes from the heyday of five or six years ago, however:
- Buyers are cautious.
- Everyone is looking for a deal.
- There's a large amount of bank-owned and short sale inventory for buyers to choose from.
- Nearly 25 percent of home sales are to investors.
- More and more sales are to all-cash buyers (a record 35 percent in March).
For the most part, desirable, reasonably priced homes are getting offers more quickly than they were last year, and in some areas aggressively priced homes are even getting multiple offers. (These are often bank-owned homes, which are frequently priced below market in order to generate interest.)
Where are we headed from here?
On the positive side, interest rates are extremely low (in the high four percent range), many buyers now feel that we've either reached the bottom of the market or are extremely near it, and consumer confidence is on the rise.
On the negative side are the price of gas, political unrest in the Middle East, economic effects of the earthquake in Japan, and any event that would affect the security of the United States. Lending guidelines may become even more strict, and there's a lot of distressed property inventory to get rid of before things normalize.
The primary element of a stable housing market is jobs, however. Even though the unemployment rate just popped up .2 percent to 9.0 percent, many economists found positive signs in recent reports - including the much higher than expected nonfarm payroll report that came out on Friday. Whether or not we get sidelined by national debt ceiling woes or continued high gas prices later this year remains to be seen.
The bottom line:
Prices always eventually follow demand, and right now demand is stronger than it has been for a while. Don't expect home prices to skyrocket anytime soon, however. There's a large selection of aggressively priced short sale and bank-owned inventory out there that is helping to satisfy buyer needs.
The good news: Last year at this time it felt as though the government and the real estate industry were cheerleaders for a game that consumers were only half-interested in playing. This year the home buyer is surprising everyone by striding strongly out onto the field, despite economic and international events that should be holding people back. We'll have to wait to see how the game turns out, but it looks like things are moving in a positive direction.
Do you have questions about any of this information? Please call me, or just click 'Reply' to this email. I'll be happy to give you my take on our local real estate market, or provide you with any other real estate advice that you may need.
(What the lawyers make us say: The information in this newsletter is deemed reliable but not guaranteed. Please always consult a qualified expert before making decisions based on this content. Nothing in this article is meant to be taken as expert legal, financial, or medical advice.)