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House Prices Will Continue to Tumble

We have written several blogs recently quoting numerous sources saying now is the time to buy a home. We agree that now is definitely the time to buy. This is NOT because we are calling the bottom for real estate PRICES. What we have said is that the COST of purchasing a home is probably near a bottom or has hit the bottom.

The difference is that COST is determined by two components: the price of the home and the expenses associated with mortgaging that home. As we have put forth in several posts, we believe that the expense of obtaining a mortgage will increase as the year goes on.

We also believe strongly that, in most parts of the country, prices will continue to soften. Here are the reasons why:

Existing Months’ Supply of Inventory Is Still Too High

A balanced market (where prices are stable) can handle 5-6 months worth of active inventory. Anything less than 5 months constitutes a seller’s market as there are not enough houses to meet buyer demand. This usually results in price appreciation. Anything more than 6 months constitutes a buyer’s market as there are not enough buyers for the number of houses on the market. This usually results in price depreciation.

Currently, as per the National Association of Realtors (NAR), there is a 9.2 month supply of inventory. This alone would put downward pressure on prices.

Distressed Property Inventory Is About to Enter Market

There are over over 4 million homes that have the potential to become a distressed property sale (foreclosure or short sale) over the next few years. A percentage of these properties are set to enter the market before year’s end. No one knows exactly how many will come to market in each region but the common belief is that the number will be substantial.

These properties will sell at a discount thereby attracting a portion of buyers in the market. After they close, they can also be used in an appraisal to help establish values of other homes which sell in the area. A short sale sells for approximately 90% of it’s non-distressed value. A foreclosure sells for approximately 65% of full value.

Bottom Line

The inventory of homes currently for sale added to the inventory of distressed properties about to come to market will far exceed demand for the next twelve months. When there is less demand for any item then there is supply of that item, prices fall. Check with a local real estate professional to see how this may impact the value of your home over the next year.

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5 replies
  1. David Mott
    David Mott says:

    “After they close, they can also be used in an appraisal to help establish values of other homes which sell in the area. A short sale sells for approximately 90% of it’s non-distressed value. A foreclosure sells for approximately 65% of full value.”

    I feel a need to reiterate that, outside the perceived value of the location (the lot value), if the property (house and maybe unattached structures) is selling for less than the cost to build it, which is usually less than the insurance replacement value, then one has to assume that the appraisal process is broken. Of course, a value adjustment should be made based on improvements and or neglect.

    It’s ridiculous for an appraiser to set a price based solely on local sales prices when the sales prices are distressed sales. The cost to build approach is part of the appraiser’s methods, but they apparently aren’t using it.

    Using MLS sales data alone is probably what created over priced average property to start with.

    National market data is the story and people seem to be attracted to train wrecks, but market data at the local level is the only story with an impact to the wallet.

    Using a price per square foot valuation is a good place to start. I see a serious disparity between the value of the property assigned by the county, the value assigned by the insurance company, and the value assigned by the appraiser. These three separate appraisals don’t ever seem to line up. Why?

    At any rate, I don’t expect that we’ll see a real uptick in the real estate market until we see more job creation, more population, or rising mortgage interest rates (bringing in private investment).

  2. LuxurySarasotaRealEstate.com
    LuxurySarasotaRealEstate.com says:

    Great post.

    Fortunately, in Sarasota, Florida we are eating through our inventory. Right now we are hovering around 6 months. You can see that in my most recent blog post – http://www.luxurysarasotarealestate.com/blog/large-drop-in-sarasota-homes-for-sale.html.

    Buyers are flocking to the best properties that are priced right leaving the rest of the overpriced or garbage houses to sit. I am having a difficult time finding homes for some buyers.

    If we had a better economy and job market things would really look good.

  3. Jonathan Lerner
    Jonathan Lerner says:

    The fair market value is the price one is willing to pay. A real sale price IS the real price. All so called experts who say a house is worth such and such are as we have learned just pulling numbers from thin air. About time we get professional about such big investments instead of part time players who sell talk!

  4. Susan Horton
    Susan Horton says:

    I’ve been hearing and reading a lot of the same thing. Plus with Freddie Mac in trouble, it could become harder to obtain a home. If people are concerned about buying, they might want to consider the low interest rates and the fact that the down payment amount is currently low. After that, the only concern is whether housing prices will fall. Who knows for sure? Maybe they will go down, but they will also come back up and at the current prices and interest rates, buying a home right now is very affordable and makes sense.


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