Welcome to the new abnormal. Interest rates are hammocked at 55-year lows. Buyer activity is squatting like it’s 1993. There are plenty of available homes in the new abnormal, yet even this favorable buyer’s market hasn’t caught the buyer’s favor. In the new abnormal, the economy is currently driving the housing market, not vice versa.
So where exactly does the market stand in this strange land? Short answer? The aforementioned 1993 in terms of buyer activity and 2001 by way of home prices. The market stands where it is right now due in large part to the second iteration of the first-time homebuyer tax credit. The price free-falls of 2009 could very well have continued, but the credit propped up prices by incentivizing additional demand. And as Sir Isaac Newton put it so eloquently over three centuries ago, every action has an equal and opposite reaction. This absolutely applies to commodity market intervention such as homeownership incentives.
There is nowhere this is more evident than in the accompanying chart. Pending home sales peaked at the end of April 2010 when the second tax credit ended. But, much like the entire market in 3rd quarter 2006, that bubble burst. The tax credit stimulated record-breaking home sales in March and April at the cost of May, June, July, August and possibly through part of 2011. The market is suffering from a textbook case of displaced demand—unfortunately one of the uglier negative externalities of artificial “market” incentives.
But this can’t come as a surprise since home buyers are (generally) rational in their purchase decisions and responded favorably to free money—who wouldn’t? What’s unclear is the amount of new business the credit stimulated compared to the amount of purchase activity that was simply shifted forward in time. We believe more in the latter.
The keen observer will note that 2010 home sales are hanging significantly lower than last year’s levels since the credit ended compared to how far above last year’s levels they were before the credit ended. In other words, the bad is now worse than the good was good.
Equally astounding is the fact that this plunge occurred during the usual peak home sales months. It’s likely the result of equal and opposite market overcorrection. Think of a pendulum whose power supply was shut down—it overswings gravitational equilibrium in both directions several times before it settles into an even balance. It’s either that or there just aren’t any more buyers out there until the next iteration of home consumers enters the market.
So does sharp growth followed by sharp decline outweigh the stability and steady growth that may have at least kept pace with last year’s levels? Well, though median sales prices have posted welcomed gains by year-over-year comparisons for seven consecutive months, economic theory suggests that this cannot continue in the face of suppressed demand. It’s not that we don’t appreciate the upward price mobility; it’s just that we’re suspicious of the peculiar combination of market activity and acknowledge the possibility of further lurking price dips if demand isn’t restored.
Upwardly inching inventory figures will try to exert additional downward pressure on prices, just as they do in any commodity market. The question is whether demand can absorb the current supply before prices respond negatively to the expanding inventory. Before that can happen, the economy needs to improve in order to repair consumer confidence and restore buyer activity.
Oddly enough, the housing market seems to be waiting on a green light from the economy. Housing starts and home purchases typically fuel economic growth by stimulating demand in the manufacturing, lumber and skilled labor sectors of the economy. These secondary and tertiary economic benefits have historically reverberated throughout the economy and have been known to jump-start it during down cycles. And that’s just not happening.
The flip side of all this is examining the opportunity costs of such an investment at this scale. Are there alternative means by which our public officials could have strategically targeted these dollars that would have sped up a broader recovery?
Speaking of which, the sequence of recovery events should look something like this: widespread private-sector hiring resumes, national unemployment drops below 6%, mortgage delinquency rates begin a measurable decline, housing demand makes an epic comeback, and prices continue to stabilize.
Welcome back to the old normal. The year is 2000. Please be careful as some items may have shifted. Let’s try that last decade one more time.
David Arbit is a Market Analyst with the Minneapolis Area Association of REALTORS® in their 10K Research and Marketing division and holds a Bachelor’s in Urban Geography and a Master’s in Urban and Regional Planning with a focus on Housing and Economic Development. He has worked extensively in the public, private, university, and non-profit settings on housing issues, housing finance, foreclosure prevention, economic and workforce development, econometric modeling, spatial data analysis and a variety of neighborhood-level initiatives. He may be contacted at [email protected].
Note: Both the numbers and insights derived from the numbers reflect regional trends in the 13-county Twin Cities housing market. All data comes from Northstar MLS.
Personally, I'm finding countless (and I mean the vast majority of) MLS listings priced around the $350,000 mark that in the late 90's to the year 2001 were purchased for around $150,000 (this basic ratio holds with great merit and accuracy in this price range).
One current example is an active listing in Southwest Minneapolis priced at $389,900 which was purchased in 1998 for $159,000. No big improvements were made by the current owner. Even at a nice 6% appreciation between 1998 and 2010 that listing should only be priced around $275,000. Where's the $390,000 coming from? That's 30% overpriced! I'm not seeing a 2001 price here!
Simply, this property and many, many others listed today need to "adjust" downward by a large percentage to hit normalcy (notice I said adjust and not deflate). Now, should I buy that property now or wait until the price drops to around $275,000? It certainly isn't going to appreciate for 5 to 7 years. What if I have to sell? No appreciation and/or equity?
The real abnormal today is seller's are "still" pricing their homes at near bubble prices expecting miracle workers to sell them at those overinflated amounts. I feel sorry for today's real estate agents that are facing buyers and promoting these prices. How do they sleep at night? Tough road when your livelihood depends upon sales commissions, I guess. Fact is, many agents are telling their friends to wait and rent for now!
I could give you a list of 50 homes that if you could get the seller's to sell them at true 2001 prices they would sell in less than a month. Trust that people will be smart enough to know when prices have truly leveled out. Keep the term "adjust" separate from "deflate". American's are smart enough to rationalize this. No PhD needed ;)
Posted by: danosteel | September 06, 2010 at 08:23 PM