Are We Seeing the Bottom and a Market Turnaround?

It’s no secret that qualified potential buyers are sitting on the fence, waiting for some indication that real estate prices are at, or near, their bottom. While increasing sales prices are an obvious sign, buyers who have a strong desire for a wide selection at the best possible prices will need to act before that occurs.

For many potential buyers, it isn’t so much about getting the lowest possible price as it is feeling secure that they made a wise investment. Already buyers have the benefit of interest rates that are at their 50 year lows.  If they plan to stay for 10 years, it matters less what happens in the next two years to sales prices than it does where they spend those two years. There are real and tangible benefits to owning where one lives. One we keep overlooking is satisfaction. We love our homes, and we love owning them and doing with them what we want.  It’s the feeling known as “pride of ownership”, and it is a mentality every homeowner understands deeply.

Even so, most potential buyers will need some assurances that things won’t fall much further. And, there will be signs. In the fall of 2005, with inventory low and prices at an all time high, sellers were told that if they intended to cash out, now was the time. I remember telling my sellers that we were short of houses and they could get top dollar at the time, with a quick sale, and often with “multiple offers”.  While I had no way of knowing that we had reached the absolute summit of sales prices, all indicators pointed to the fact that we were close.

Now buyers and sellers alike are wishing for a crystal ball, and I wish I had one for them.  This is my 33rd year in the business of residential real estate, and I have come through 3 of these cycles.  While there is never a way to know the absolute top or bottom of the market, there are economic indicators that historically have pointed the way.  (Read my post about “timing the bounce”. )

In finding bottom, here are some things to consider:

1. Local employment

One of the factors affecting the selling price of real estate is local employment.

At first, all the talk of the housing crisis was about over-leveraged consumers. But, we have now moved to a more critical phase. If you do not have a job and you have little to no savings, you can’t make a mortgage payment, period.

When the job trend reverses, when we begin to create a few hundred thousand jobs over a few months, an enormous pent up demand will return to a limited selection of good housing stock. At the moment, one in seven of the nation’s houses is vacant. Many are in various stages of disrepair, functionally obsolete, or located in the wrong place.  (Remember that this speaks to housing as a whole.  The area wher I live and work, on the Westside of Los Angeles, has suffered about a 28% average downturn.  Your area will be different; consult a Realtor® for the latest housing statistics from the National Association of Realtors®. (Find the Southern California First Quarter Market Statistics report here.)

Unemployment filings will likely continue to fluctuate for a while and are sometimes more indicative of changing industry dynamics than the actual employment health of a local community. If your region is anticipating stimulus funds or has modern growth industries that will be developing jobs of the future, your employment picture should start to improve.

Local communities’ recovery time will vary, reflecting employment conditions.

2. Return to historical baseline of sales

To understand the market dynamic, it is important to understand “normal” for your community. Every month, a finite number of residential real estate transactions occur. In a down market, the number might be as few as half the number of sales during a boom market. But over time, it tends to average out.

Determine a monthly baseline of sales for your community. Obtain a history of sales activity for the past ten years. This will give you a measure that includes sufficient market ups and downs.

In a recovering market, there will be a return to the historical baseline of monthly sales activity.

3. Reduction of available inventory

Just as there are historical baselines for sales activities, there are also similar baselines of available property offered through builders, the MLS, and occasionally, private sellers. Simply tracking the number of listings through the MLS will give you a clear picture of the direction of inventory.

Knowing the baseline of sales activity, you can determine how many months of available inventory are currently in the local market. If inventory is shrinking, the bottom is near.

4. Relationship to cost of new construction

In many communities, sales prices are actually below replacement cost. And, that in itself suggests the bottom is near. If builders cannot recoup their costs and make a profit commensurate with the risk, they will cease building until sales prices begin to rise. Recognizing that prices are actually starting to rise and that resale inventory is shrinking, pent-up demand will pour back into the market.  Remember, all the people not buying these days will combine with normal baseline demand and overwhelm the market.

5. Hidden price stabilization

Recent reports of sales prices often seem to assert that these sales prices are representative of the value of housing in general. First, that’s just what sold that month. Since distressed properties make up much of the market, it stands to reason that those prices would reflect smaller square footage and a discount equivalent to the cost of rehabilitation.

Some homes are more desirable than others. What about those homes with extra features or those located in good school districts? Are their prices holding? If so, your community may be on its way to recovery.

For potential buyers, finding bottom is less important than knowing that it is near. While it is impossible, given our unprecedented circumstances, for anyone to say for certain when prices will begin to rise in each community, the buyer who knows the signs of recovery will already be settled into the opportunity of a lifetime. In growing communities, housing must and will return to the cost of replacement or new construction.

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