I recently had a friend, from when I was much younger, reach out and ask me:
I see unemployment is down but the numbers don’t reflect how many are not actively pursuing jobs. Gas prices are down and the stock market is correcting. From a real estate stand point is the economy holding or beginning to go down. I understand these things go in cycles.
Great question… let me try and tackle it.
First and foremost, Real Estate is a local thing. When you hear “major players” like Barbar Corcoran talking on the Today Show, you’re getting a 10,000 foot view of the market – or more! The fact is, you live on the ground. So, while it may be valuable information for those looking to invest in real estate, it’s not all that informative for those of us looking for a place to lay our heads at night.
Now, the market has come a long way… a LOOOOONNNG way from the doldrums of 2009-10. Houses actually sell right now, and values are, at very least, steady – if not climbing ever so slightly. The variable in the market from 2009-10 is the same one we deal with today – Inventory. Real Estate is a great lesson in supply v. demand. Back in 09-10, we had too much inventory, all over the board. We had McMansions that were 1-2 years old, we had brand new construction that was build on speculation, and we had older homes that people paid inflated prices for during the boom. The new construction was in pristine condition; however, it was priced at a premium that the market could no longer support. Inflated land purchases from a few years earlier drove the hard costs up. So, builders were losing their shirts. The McMansions were underwater, and the owners – many who went “stated income” and didn’t make the income they stated – could no longer keep up with general maintenance. Similarly, the older homes were under water and couldn’t be kept up. So, while inventory is measured in months, typically, in 09-10 it was measured in years.
A six-month supply of inventory is considered a balanced market. When it goes longer, leverage shifts to the buyer. When it dips under six months, it’s a seller’s market. We were in a buyer’s market with all kinds of inventory.
Today, we still have an inventory problem. We’ve metabolized the short sales and foreclosures. They’re no longer the driving force in the inventory we have. In fact, the issue now is that we don’t have enough inventory. That is a huge problem.
Why do we have an inventory problem?
Now, this is clearly all opinion; however, it’s also what I see on a daily basis at listing appointments and through discussions with clients. The issue seems to be that all of the homeowners that have weathered the storm of the bubble bursting – those that had to beg, borrow and (possibly) steal to keep their homes – have no equity. They’ve worked hard to keep up with the commitment they made. They’ve lived paycheck-to-paycheck, sometimes bridging the gap with credit cards, loans, whatever it may be. Now, the noose of debt has loosened it’s choke-hold and they’re more comfortable, but with no equity. In short, they cannot afford to move. Who wants to write a $20k check at closing - when they’re selling their property! Most of these homeowners are “housepoor” and can’t move because their home is worth – at best – what they owe on it.
Feeding this problem is the lack of credit. Now, I am not saying the banks aren’t lending – they are; however, the homeowner that has done everything they could do to live up to their commitments through a job loss/change, divorce, etc over the past 7 years has been rewarded with unlendable credit scores. That will eventually fix itself – mark my words, Subprime lending will be back (in some cases, it already is).
Why is the lack of inventory a problem?
The market is driven by one thing – sales. Real Estate settlements are the fuel for the market. No fuel, you don’t go anywhere. As my college wrestling coach would tell us, “whether you’re a Ferrari or a Jalopy, when you’re out of gas, you’re out of gas.” Right now, our market is out of gas. Without sales – especially at the higher end – the values don’t increase. Without the values increasing, homeowner’s don’t have equity. It’s a round-robin. Slow sales = slow value increase = low inventory = slow sales… and so on, and so on, and so on.
OK, so what’s ahead?
As my friend mentioned in his question, unemployment is down, and gas prices are down. If there’s a hope in the market, it could very well be those two factors. Unemployment being down means that incomes are on the rise. More people are working – despite those that left the market (let’s be honest, wouldn’t we all leave the market if we could? But, we can’t.). Gas prices being down will lower total cost of living. Remember in 2008 when gas was approaching $5 per gallon (if you drive something that requires 91 octane or above, you eclipsed $5 per gallon). Today, the average gas price has dropped below $2 per gallon. This means more “expendable income.” Now, this income can go a couple of ways. For many, it will be a flat screen TV and new whip. For others, it will go to paying down debt and adding to savings – these are your future sellers (and buyers).
Ha… your guess is as good as mine. If I had a crystal ball, I wouldn’t be selling real estate, I would just play Powerball.