The Real Story…
News and commentary about the real estate market and related topics.
Dave Parrish, ABR®, CRSA, CSP, GRI, ePRO®,REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
Recovery will not happen for all…
It may not sound fair but the truth is that the recovery, when it comes, will not happen for all.
It’s a well-known fact that the market is subject to the law of supply and demand. In the area of real estate these two forces are moving in opposite directions. At the height of the market, the real estate market experienced an artificial demand created by unsustainable and just plain stupid lending practices. That demand produced a phenomenal increase in housing starts and thus inventory to meet the “demand.”
Once the results of those lending practices were realized, the supply and demand were simultaneously hit in a manner only paralleled in the 1930’s. Foreclosures began to add to inventory while lending policies slowly eroded away the “eligible” buyers. Then came job losses, realization of the financial debacle, more job losses, more foreclosures, etc. But then you already know that.
The point here is: What does the future look like?
There are several dynamics at play here.
Supply: Supply is continuing to grow… largely attributable to foreclosures, but we’re still building new homes albeit at a much-reduced rate. This supply will continue to grow at least until unemployment falls below 7%. According to Mark Zandi of Moody’s Analytics, we will probably be at 7.0 – 7.5% unemployment in the third quarter of 2012. Even when we fall below 7% unemployment supply may grow due to shadow inventory and a natural lag time for the market to respond. Don’t expect any major relief in supply prior to 2015.
Demand: Demand will continue to weaken… Partly due to a return to sanity in the lending process; but also largely due to consumer confidence issues based on continued unemployment and the supply-demand gap. It is my opinion that demand can’t increase until unemployment falls below 6.5%… My guess this happens around mid 2014. Again expect some lag time for demand to be noticeable probably Q2 2015.
Consumer Expectations/Trends: Lots of things happening here… The McMansion era is over! The idea that less is more has definitely set it roots in the psyche of today’s buyers. Even so, consumers have come to expect more from their homes… energy efficiency, low maintenance costs, livability and style. Unless in a superior location homes built pre-1990 are considered functionally obsolete and are in for a serious hit. Even post 1990 homes must have been kept up-to-date and at least reasonable well maintained. Today’s buyers are rarely Do-It-Yourselfers… painting and replacing carpet can be major obstacles to making a sell. Increasingly younger buyers are considering more urban locations, as urban sprawl and commuting are seen as more than just undesirable… life style and freedom are major concerns.
Blighted Communities: There are whole communities that will be impacted by the game of musical chairs created by the supply and demand gap… With so much inventory to select from, buyers are increasingly avoiding those neighborhoods with those functionally obsolete homes, neighborhoods with high foreclosure rates and numerous unoccupied or ill maintained homes. At some point that level of decline is seen as too big a risk. So that, even a well-maintained and otherwise marketable property has little marketability due to the law of location. These communities will not recover, if the status quo is allowed to continue, and truth be known are probably already beyond any realistic hope of recovery.
Overall financial trends: While current lending rates are at historic lows, lending requirements are increasingly troublesome for many potential homebuyers… but not yet unreasonably so. The lack of inflation has reduced the leverage once available to the average homebuyer (more on this in a future column). Declining property values have produced another phenomena: the strategic Walk-A-Way (previously discussed here) is on a disturbing increase and likely to worsen the entire market if treatment remains as is.
Possible Cures/Aids: Any serious effort to restore the market has to be multi-faceted. Following are my suggestions:
1. Rather than extension of tax cuts, provide tax credits for the following activities:
- Energy Reduction Measures for existing homes
- Other targeted activities that create jobs.
2. Realizing that foreclosed and un-occupied homes exacerbate the decline of property values and communities, develop a program to encourage rental of foreclosed homes to existing homeowners at a reduced rate so as to reduce the number of un-occupied homes (something like a section 8 program). Such measures should have a required maintenance clause to qualify for the reduced rental rate. Many may see this as rewarding those who have defaulted on their mortgages. However, to allow homes to erode hurts all in the community, as well as the lender and the overall economy.
3. Develop rules that identify Strategic Walk-A-Ways and charge the loss to the homeowner as taxable 1099 income from which they are unable to claim bankruptcy.
4. Modify Bankruptcy laws to reward those individuals electing to honor their debt through Chapter 13 rather than Chapter 7.
Individual Actions: At the same time homeowners need to be aware of their position in the marketplace and its impact on future values. Planning ahead is the key idea. Consult with a trusted real estate professional to understand what is likely to happen with the market value of your home over time, so that you can avoid or at least lessen the potential negative impact of the market. If looking to take advantage of the decline in market values as a buyer, you will also need this expertise to plan your purchase for the future. A low price doesn’t necessarily translate to a good buy.
May the market be with you.
