The Natural Cycle of the Real Estate Market

This blog was originally published by Greg at: http://blueroof.wordpress.com/tag/blogroll/local-stuff/
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As the real estate market was rising nationally the last few years the media went hog wild over the frenzy and everywhere you looked there was someone or something telling you that real estate was HOT HOT HOT! Prices were going through the roof and there was unprecedented growth and people were becoming multi-millionaires from selling their homes. It was craziness.
Now the “national market” is going through a correction because it has to- there was too much too fast. In many areas prices and inventory levels are decreasing. Is that a good thing? Yes, it is. It’s healthy for each market to go through it’s cycle. This ebb and flow is good and allows each market to grow and then collect itself and catch up, and then eventually grow again.

Often when an area does go through a slowing or correction, the prices do not actually go down, but rather just don’t go up as fast. Usually the decline of a market is actually just a decline in it’s growth rate.

Areas can see rapid appreciation for different reasons. Usually it’s because of either speculatory (investment) buying or a major influx of people in a short amount of time. When an area has too many properties being bought and sold solely for investment purposes, the market values rise quickly, but this can create hollow values, because the values rise faster than the populations ability to afford them.

When an investor buys a home for $200,000, puts $70,000 into remodeling and then sells that home two months later for $400,000, that home gained 100 percent appreciation in two months. No worries. But if that happens to 20% of the homes being sold in an area over a year, and the prices are now growing exponentially while the area wages are staying the same, you have trouble.

Eventually this can catch up to the market when people are no longer able to pay the prices of the homes. The other thing that happens during this time is people begin to notice how much these neighboring homes are being sold for and they want in on the action. When a market heats up and prices begin to rise quickly everybody starts throwing their homes on the market and the market becomes flooded with property.

Eventually when the demand slows, but people are still wanting to sell for more and more, those home-sellers (who are always the last to accept the end of a growth period) will need to adjust for this and the market can correct itself. Historically this has happened through a period of prices staying relatively flat and growth slowing for a period of time until the demand increases again.

When both factors happen at the same time (investors flipping homes and people throwing their homes on the market to get the high prices), and when new homes are built rapidly in the area because of the demand and the construction brings jobs related to that construction it can really make things interesting. Because these jobs are created by, and sustained by, the real estate market.

This is what happened in Vegas between 2001 and 2005- people began to move into the area, then investors starting buying and flipping homes, and then home builders began building homes as fast as humanly possible and they were hiring people to help build all of these homes and to staff the expanding casinos and the market appreciated over 50% in a year. When the market reached the point where the demand was no longer there (everyone had bought a new home?) and all of these builders no longer needed the help and the construction crews needed to sell but couldn’t and the prices had been artificially driven up by the investors, what happened to the market? It’s now in a period of decline.

According to Marc Garrison, founder of The National Association of Real Estate Investors (NAREI), there are four main components of the real estate cycle every area experiences. These are Expansion, Equilibrium, Decline and Absorption. It’s important to note that this cycle not only applies to large geographic areas, but also applies to cities and even neighborhoods.

Expansion brings job growth, population growth and a high demand on the infrastructure of an area. Roads need to be built, restaurants open, hospitals expand and prices rise.
Equilibrium is when things begin to slow and settle. Prices have reached their limits, or beyond, and this period of time brings high prices and as a natural consequence less businesses move into, or expand in, the area. Governments are less likely to offer incentives to businesses to move into the area and job growth slows.

Decline then occurs as the job growth stops and businesses begin to relocate to save money and the demand for housing decreases. During this time, prices become stagnant or even decline as rents and occupancy go down. Usually this decline is merely a slowing of the growth rate, but in markets where the rise was too fast the decline must result in a correction (decline) of prices.
Absorption occurs as the lower prices and occupancy fall below the national averages and/or the area becomes attractive again to businesses looking to relocate. Governments again begin to incentivize business to move into the area and the population begins to grow again.
These four periods of time are all necessary and this is why real estate is so local. One market may be in a period of decline, which pushes another market into expansion.

Just as nature has it’s seasons, real estate markets have a healthy way of transitioning from period to period. Experiencing these transitions and understanding them can give home buyers and sellers not only an understanding around them, but hopefully, more peace while trying to navigate through the moving process.

REAL ESTATE BARGAINS

If you are looking for a bargain in real estate, you have to keep your eyes open, check your email for updates at least once a day (you are receiving daily updates of new listings, aren't you?), and move quickly when you see the right property.

The property to the left has a 1 bedroom condominium that just came on the market today at $129,900, well below the city assessed value of $271,000. I took a walk through it, and through it needs a little bit of work (new carpets, paint)

Located on Lynde Street in downtown Salem, it is a few minute walk to the commuter rail station, and to some of the best restaurants on the north shore. I bet it won't last more than a couple of days on the market.

Many of the bank owned properties aren't bargains because the bank is owed more money than the property is worth. Most of the properties that were foreclosed on recently were purchased with 100% financing, and the real estate market has seen some lowering of values over the last year. The market seems to be pretty stable right now, and by most accounts will be flat for the next year or so.

It's been a while since I posted an entry in my blog, but I'm going to do my best to keep it updated. The real estate market has been very busy. I had 2 new single family listings that received multiple offers after the first open house this month. The phone is ringing, and we are doing plenty of showings. I hear from other Realtors that their business is slow, so the only thing I can attribute our full schedules is that we have a huge internet presence, and work with closely with the hundreds of buyer clients registered with us.

The National Association of Realtors® released their existing home sales report today. The report indicated that existing Single-family home sales rose 3.7 percent from the month prior.

David Lereah, NAR’s chief economist, said the strong gain is a bit of a surprise. “Some of the rise in home sales may be from mild weather that brought out shoppers in December, but fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers,” he said. “Even so, winter storms last month discouraged shopping, and buyers were chilled with the third coldest February on record. These unusual weather patterns mean home sales that close in March may decline before rebounding later this spring.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.16 percent in the last week, down from an average of 6.29 percent in February. The 30-year fixed was 6.22 percent in January, and 6.25 percent in February 2006.

Regionally, existing-home sales in the Northeast surged 14.2 percent to a level of 1.21 million in February, and are 3.4 percent higher than February 2006. The median existing-home price in the Northeast was $265,900, down only 1.4 percent from a year earlier.

Single family homes are doing the best right now, with many homes going under agreement in under a week if they are priced right. That is the key - pricing. If a home is not overpriced, and in a desirable neighborhood, it will sell fast. If you are a homebuyer, that means getting an offer in as soon as possible after you see a home you really like. Do not low-ball properties that are priced right. If you are working with a buyer agent (and you should be!), he or she can advise you on the amount you should offer.

Jim

Halloween in Salem! It's a time for scary going ons in this city, but real estate isn't one of them. Though if you read some of the statistics that are out there for real estate sales, it may scare the bejeezuz out of you.

Just yesterday I was reading the single family sales for the first 9 months of this year in Salem MA compared to last year. The number of homes sold were almost exactly the same - 162 for 2005 and 160 for 2006 - statistically the same. The big difference is the average sale price - $359,500 for 2005 compared to $319,750 for 2006. I know what you are thinking - OMG, that's a almost a 12% decrease! The bubble has burst and the real estate market is in shambles!

But let's take a closer look at the figures. For an accurate look at the market, you have to compare apples to apples - or in our case, similar style and age homes. You cannot just take the total sales and make generalizations about what is happening with the market. Lets take a look at the sales for a specific home style. I'm going to use capes, because they were for the most part built around the same time - late 1940's through 1950's. I'm going to further break them down and only look at 3 bedroom capes. Now I could narrow it down even more by looking at square footage of living space, # of baths, lot size and neighborhood, but for this purpose just style and bedrooms will do.

In 2005, the average 3 bedroom cape-style home sold for $351,857. In 2006, the average was $339,900. This is a difference of just over 3%. Quite a bit of difference between this and the 12% published in Bankers & Tradesman. But it is a more accurate picture of the real estate market. The reason Bankers & Tradesman shows such a difference is simple - less expensive homes have been selling faster than more expensive homes. It not because the bottom has fallen out of the market.
Real estate runs in cycles, and we are currently going through a normal cycle. In every case the prices comes back up again and usually surpass where they were before the downturn. So is today a good time to buy a home? Yes, it's a great time to buy. Mortgage interest rates are still great, and because there are so many homes on the market, the sellers are willing to negotiate. Your best tool in this (or any) market is your real estate agent. Your agent will help you find the home that meets your needs, and will help negotiate for the lowest price.

So if you want a home, get off your arse (sorry, it's the Scottish in me), and make some appointments to see a few homes. You may even find your "dream home" (more on that in a later blog).

Jim

An article in this week's edition of Bankers and Tradesman pointed out how the current real estate market has made it a great opportunity for prospective home buyers to get a good deal on a home. Most home sellers now realize that their price has to be reasonable if they want their property to sell anytime soon. The thing to remember is that this is a normal real estate cycle. There are ups and downs in every cycle, but prices always eventually go up again. How long will this take? Your guess is as good as mine, but according to yesterday's Boston Globe article the prices have bottomed out and now is a good time to buy with mortgage interest rates still low (take it from someone who paid 13% back in the late 80's) and sellers willing to bargain.

But don't wait for an open house to see that home that you like. Many agents are not doing open houses because they have been getting very little response to them. Call your Buyer's Agent to make an appointment for you. This is even more important if there has been a recent price drop on the property, because that usually creates a plethora of activity, even in a slow market.

Here are some stats for the current real estate market on the north shore of Massachusetts.

Compared to this same day 1 year ago:

• There are 7364 properties on the market. Last year there were 6414.



• Time on market this year is 146 days, compared with 105 days last year.



• The median price is list $379,900 compared to $395,000 for 2005.

These stats are for a combined single, multi and condos.

Average sale price over the last 3 months was $408,537, compared with the same 3 month period last last of $403,369. Confusing, isn't it? First I tell you that the current on market prices are lower than last year, then I tell you that the last 3 months sale prices are higher that 2005! What' sgoing on?

Well , the key phase is that the sale prices were for the last 3 months, which included a pretty good sales period. It's only the last couple of months where we have seen wholesale dropping of prices, which is why the current list prices are lower than 2005's.

Of course, every town varies slightly. Salem for example is still doing very well, mainly because of the proximity to the commuter train and the vibrant downtown (where everyone wants to live!)

Salem MA Real Estate

This is the first of what I hope to be semi-daily updates, comments and general ramblings about the real estate market in Salem Massachusetts and the surrounding north shore area. Please feel free to leave your comments.