Can a real estate market have no bottom?

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Freshly returned from Inman Connect Panel duty, it seems that my topic had serious wings and has taken flight. Our Friday AM topic:  “Crunching the Numbers To Find the Turnaround” (a synopsis by Scott Sambucci can be found on SeekingAlpha).

While I'm not quite ready to play Obama's chief economic advisor, I do have lots of numbers at my finger tips.  Our prediction is that - almost without exception - 2009 will see an overall price decline in virtually every market.  Volumes will start to recover, but fueled by distressed properties in many markets.

That's probably not new news.  But evidently a hot topic for Yahoo! which picked up Forbes' article on finding the bottom in the America's worst markets today.  "America's Weakest Housing Markets" doesn't hold a lot of surprises for us at Onboard.  While not "in the business" of making predictions, we do forecast prices and activity out at least four quarters and we're seeing prices hold or rise in fewer than 5 percent of markets for 2009.

Note: As usual, it is hard to do apples to apples comparisons.  Forbes' indicated that the most current sales data available is from Q2 2008, and their predictions represent the inclusive change from then forward.  (Onboard has sales through December 2008 in many markets, as well as complete distressed property information, tax basis info, CPI, employment trend and a proven valuation program by comparison).

What are some of the factors in predicting the bottom?

Markets are complex, living things.  To look at distressed property inventories without looking at employment rates or income to price ratios is like deciding which concerts to attend based on venue without considering whether you like the artist.

The bottom line:  prices are out of whack.  Period.

Until either they correct OR other expenses catch up (inflation), prices will continue to fall (or if sellers won't lower prices, volumes will continue to plummet).  We're seeing huge volumes out in California today as prices for distressed properties have fallen to a sweet spot that is making sense to investors and home buyers.  But look at the non-distressed segment and volumes are still low.

Meanwhile, in NYC, volumes are low overall and prices are just starting to come down.  The timing on the downturn is 18 months or more behind the west coast and with different market factors (such as international demand) most don't predict as long or deep a slide.

And then you have Detroit.

What to look for?

If it isn't clear already, real estate is local.

You have to think locally as you approach the market and predict its future.  Yes, interest rates, crazy cram down measures, and better lending practices at a national level can have impact.  But they are NOT the drivers behind a turn around.  The market will turn around when enough buyers believe that property is priced correctly again.

Think about how each of the following impact your local market.

  • Employment - are you ahead or behind the national rate?  Are people optimistic?  Are wages falling or holding steady?  Factory closings and layoffs can have dramatic impact on a localized market.  Onboard incorporates employment trends in our valuation processes.
  • Income to Price ratios / Inflation - can first time buyers afford starter homes?  If not, then there won't be many new buyers in most marketplaces as families will choose to rent instead.   As prices come back in line with wages and the cost of goods, volumes rise.  Most economists predict a rise in inflation - which for the housing market, right now, would speed this process up.
  • Distressed property volumes - and not just the total counts, but also:  Are the number of new foreclosures each month escalating?  Holding steady?  Declining?  Are REO's coming off the market faster than they are coming on?  Are volumes on 30, 60 and 90 day notices escalating or falling? Onboard tracks REO's, defaults, and other distressed property signals and matches every incoming sale we collect to determine if it was distressed and to what extent.
  • Absorbtion rates / Days on market / Price reductions - the longer the average time on market, the more downward pricing pressure.  Don't be fooled by quick turnaround on REO"s either.  Better than not, but there's a big difference between that and turnaround on full priced sales.  And here's where good data matters.  Onboard knows when homes are de-listed and re-listed to try and beat the days on market and reduction watchers out there.  Do you?
  • Currency $$ - if the dollar remains weak, are there international buyers clouding the local picture?
  • Consumer confidence - if buyers believe that prices are going to continue to fall, they will delay purchases.  This is just as true for houses as it is for TVs.  And if they are fearful about their job stability...well would you buy a house?
  • Years in residence - I haven't heard others talk about this much, but the longer someone has been in their home, the more downward pricing they can withstand and still make a profit on their sales.   Yes, years in residence typically translates to more equity.  But that's not my point here.  If you bought low, you can sell less low...if you can find a buyer of course.  Onboard tracks this at the neighborhood level by comparing sales volumes against total housing stock levels.
  • Participation in the upswing - the bigger the boom, the larger the price inflation, and the bigger the downturn (for the most part).
  • Understanding "the curve" - typically volumes fall before prices.  Often well before.  And typically volumes will pick up will before prices rise again.  In California, volumes crashed in 2007.   Now we are seeing strong growth in volume even though prices are down 35% - 45% in many areas.
  • Inventory - take a look at some of the hardest hit markets in Florida, Nevada and California and you'll find dramatic levels of overbuilding.  So long as huge volumes of homes are sitting vacant, prices will remain suppressed.  Combine that with high unemployment and a rental market that is better priced and less risky and you see the problem.  Unless you have a very distinctive property, you can't compete against vacant.

How to stay on top?

To make good decisions you need good information.  If you want to be in position to predict your local market (rather than react to post sale data), you need to follow the statistics and find the relevant trends.

The good news is that local information is available.  Don't settle for market level statistics.  Look for neighborhood data and local services.  In many areas, even zip codes are too heterogenous to power a decision process or spot a clear trend.  And property classes (sizes, types, styles) can behave very differently.  Ask your data vendors how they can provide information specific to properties and streets rather than counties and metro regions.  Try to split condos from SFR and segregate by bedrooms or square footage.  Look for multiple data points around listing activity, sales, economic conditions, and distressed property status.  And ask to have the content integrated so that you aren't left trying to match a foreclosure report against sold home data or listing activity by hand.

The better news is that you are probably a local expert yourself.   And if you could just get the data the way you want it, you're going to know a lot more about how to find the local turnaround than I will.

Image Credit: Wikipedia