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Be Quiet Chicken Little. The Sky is NOT Falling

Be Quiet Chicken Little. The Sky is NOT Falling

There has been much speculation about what is causing the falling sales numbers in the most recent Existing Home Sales Reports (EHS) from the National Association of Realtors (NAR). Some have claimed that rising interest rates have scared buyers out of the market. Others have claimed that consumers are just losing confidence in the housing recovery fearing a new bubble may be forming. We want to look at the validity of these two assumptions.

MORTGAGE INTEREST RATES

ASSUMPTION: Rising interest rates have forced buyers back onto the fence. Evidence offered up by those in this camp comes directly from the EHS Report from NAR. Three of the last four reports revealed that sales were below sales from the same month the previous year.

THE REALITY: Though it is true year-over-year sales have fallen nationally, a closer look at the report reveals major regional differences. Sales in the West Region are down 10.7% versus the same month last year. Sales in the Midwest Region are also down but by less than 1%. The Northeast Region is up 3.2% and the Southern Region is up 4.6%.

If the issue is interest rates, why is one region virtually unchanged and two of the remaining three regions up in sales? We don’t believe rates are the challenge.

CONSUMER CONFIDENCE in REAL ESTATE is ERODING

ASSUMPTION: The pace of the recent price increases has caused many to fear the emergence of a new housing bubble. Similar to the first assumption, evidence offered up by those in this camp comes directly from the less than enthusiastic EHS Reports from NAR.

THE REALITY: As we mentioned before, sales in the Midwest Region are down but by less than 1%. The Northeast and the Southern Region have both shown increased sales as compared to the year before. Are only the consumers in the Western Region afraid of a possible bubble forming?

The fear of a new housing bubble is vastly overstated. Forty states have not yet returned to home values they experienced seven to nine years ago. Nineteen of those forty states still have home prices 15% or more below peak prices. We believe home values will continue to increase but just at a slower rate of appreciation.

It is not just us that believe this is the case. The over 100 housing experts recently surveyed by Pulsenomics revealed that they believe prices will continue to appreciate at historical annual numbers (3-4%) for at least the next five years.

THEN WHAT IS THE CHALLENGE?

If the lack of sales is not the result of increasing interest rates or decreasing consumer confidence, what actually is happening? We believe it can be broken down to three words: LACK of INVENTORY.

Inventories of foreclosure and short sale properties are falling like a rock in the vast majority of regions across the nation. These two categories of homes have driven the market for the last few years. As foreclosures and short sales sell, they are not being replaced because the economy has gotten better and more families have regained control of their finances. All fifty states have seen a decrease in the number of homeowners who are seriously delinquent on their mortgage payments with thirty nine states seeing the number shrink by over 20%.

This inventory has not yet begun to be replaced by the non-distressed properties in the country. Just this month, NAR revealed that the months’ inventory of homes for sale has dropped to only a 4 month supply. A normal market has between 5-6 months’ supply.

This is the main reason home sales are declining in certain regions – there are just not enough houses for sale.

BOTTOM LINE

With the economy improving and with homeowners gaining back some equity they lost when prices fell, we believe there will be many homes coming unto the market this spring. A recent survey revealed that 71% of homeowners are at least considering selling their home in 2014.

If you are thinking of selling, beating this increased competition to the market before spring might make sense – and might enable you to get the best price possible for your home.

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3 replies
  1. Smoky Panepinto
    Smoky Panepinto says:

    Obviously, inventory of homes is relevant, and inventory is low. However, the insane over-regulation of the mortgage industry is choking off many who otherwise would be in the market.
    I just closed a property with a 20%-down buyer… the property was quite livable, though dated. Inspections went OK, but the APPRAISER called for repairs such as painting of the hot water baseboard heating units, putting up a railing and other items — this for a conventional loan with no PMI.

    The value was found in current condition, but the appraiser overstepped his bounds, citing safety issues. Really? An appraiser is there to establish value, not be the code enforcement officer.

    The thousands of nightmare stories like this that realtors see every day are what are stifling home sales.

    Reply
  2. Dirk Walker
    Dirk Walker says:

    So why has more non-distressed properties inventory not been added?

    Inventory is symptomatic of a bigger issue(s). Supply and demand is changed by variables that influence consumer behavior. There has to be a reason why “good” homes are not hitting the market.

    Possibilities:
    1. Rates – “good” homes were likely able to refi and probably have rates below 4%. KCM is frequently advancing the financial benefits of buying before costs and rate go up. Well, that has already occurred for those who refinanced to very low rates.
    2. Prices – appreciation should raise all boats, which makes “move up” scenarios a wash in any market. However, with such tight inventory not all price segments have responded similarly.
    3. Cash Investors – with the rental market being as good as it is, and the vast number of cash investors, why “flip” when the ROR of renting is so solid?
    4. Inconvenient Truth – if a seller sells, their options are not very attractive:
    a) Rent: psychologically moving backward, not to mention obligating time frame.
    b) Buy: with lack of inventory the right home is likely not available. The costs involved to improve that property is not economically suitable, especially when you consider #1 above.
    c) Competition: with multiple offers over “good” properties you are not guaranteed to be the successful buyer.

    To be clear, I am not saying the sky is falling, but we must look deeper as to why there is a lack of inventory especially in the non-distressed segment. Why don’t these folks want to sell?

    Reply
  3. John Sheldon
    John Sheldon says:

    Wow! Great article. However, I disagree with the last sentence. It runs totally counter to supply and demand theory. Because if you want to get the best price, you will wait until there is the most demand out there, and the spring will likely have a higher demand than the winter months (historically).
    So, I say if you want the best price and the most people in the market looking to buy houses, you should actually wait until the spring. Makes sense? I think it does.

    Reply

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