Over the last several months, the issue of ?housing supply? has emerged to distract the real estate world from its musings about home prices.
Wes Burk, owner of Patterson Realty, joined us on our July 28 episode of Mortgage Matters to analyze the local real estate market. The discussion quickly turned to real estate supply and demand: folks want to buy homes, but their aren?t enough homes on the market to go around.
The drop in supply
?One of the best statistics we have in the industry to track the health of the market is months of inventory,? Burk explained on Mortgage Matters.
A healthy real estate market would have about 6 months of inventory, thus steadying supply and demand and, by extension, home prices.
Five years ago (January 2008), home inventory on the market (nationally) hit a peak of about 18 months and from there moved to 13 months (January 2009), to 11 months (January 2010), to 10 months (January 2011) and finally to 8 months (January 2012).
Since the turn of the year, in just five months, inventory has dropped all the way to 4.5 months.
Explanations for this drop are threefold, and all hit critical mass at the same time.
1) Investors buying up swaths of homes at under-value prices.
2) Consumers getting back into the market due to record low mortgage rates, bargain home prices, and perceptions that the housing market (and economy) has stabilized.
3) Lack of a source for replenishment. Builders haven?t been building new homes over the past five years due to the troubled economy. Foreclosures have been bought up, and banks have stalled the foreclosure process over the past year to deal with allegations of improper paperwork.
The result of the low inventory, according to Burk, is that ?It is a challenging market out there right now if you are trying to buy anything under about $600,000?. The inventory is incredibly low and the buyers are out in full force.?
?
Low supply + high demand = a spike in prices
The result of this pent-up demand is that homes sell higher than the listing price. Appraisers, then, have higher comparisons to work with and home prices move up.
Burk gives an example from a property Patterson Realty listed in Atascadero.
?Within 48 hours of listing we had 4 offers and before the seller could respond we had 6.?
Burk describes a common situation in today?s market: families and first-time homebuyers compete with investors, who can pay above listing price.
?One of the outcomes is people pay a difference in cash just to get in [the house]? said Burk. ?Often if they are out in the market place and have had a couple of properties bought out from under them they may be willing to throw another 5 or 10 grand into the thing just to get out of the mix and capture these low interest rates.?
?
A building boom?
Grote sees one outlet for pent-up demand: more home building.
?With interest rates being ridiculously low, the problem is only going to get worse? Then we are going to have a construction boom.?
Grote goes on to explain that the dearth of housing supply is evident in the rentals market as well.
?In a healthy renters market, there should be a vacancy factor of 5 percent?right now, we have a vacancy factor of 2 or 3 percent.?
?
But is this just another bubble?
Comparing a ?bubble? in the market today with the ?bubble? from 2008 would be comparing apples and oranges.
?Today everybody that comes into get a loan is fully qualified and not only that they are qualifying to very strict standards,? Grote pointed out.
Burk agrees, ?The difference is that demand this time around is real demand, it is sustainable, it is valid, it is appropriate, it is not fictitiously created.?
The potential for a bubble, then, is from a boom in home building if the construction does not appropriately match the level (and type) of demand.
As Grote pointed out on Mortgage Matters, current buyers are ?fully qualified, because values are in the toilet and interest rates being ridiculously low.?
When interest rates rise and a new wave of supply hits the market at higher prices, these same buyers might be priced out. At that point, we would have the same problem we had five years ago ? excess supply and few interested parties.
?
The cavalry: new foreclosure supply?
On July 24, 2012, the Los Angeles Times reported that the number of California homes entering foreclosure is at a five-year low.
Just two days later, the Los Angeles Times printed another article that suggests although foreclosure numbers have been low, they are about to get much higher.
According to RealtyTrack, ?California saw an 18 percent spike last month in foreclosure starts, or homes placed on the foreclosure path for the first time.?
It may be that these new foreclosures will fulfill consumer and investor appetite for under-market homes, but it could be that the market has opened up for new home construction. A handful of popular economic indicators back up this claim, with contractors logging the most optimistic outlook in five years and construction spending increasing in May and June.
?
Conclusion: without sustainable economic growth, we are right back where we started
The other issue to consider is the importance of economic growth in tandem with a construction boom.?More specifically, is there a lack of infrastructure to provide incentive for new housing development (we touched on this HERE)?
San Luis Obispo County may have a dearth of homes on the market, but is there enough infrastructure (read: jobs) to drive new development?
In February SLO County outpaced the national unemployment rate with 8.4 percent unemployment, which translates to 127,000 people out of work.
The debate is circular.
New house construction would create new jobs, which would in turn support infrastructure development. The question is if this process would create sustainable growth for the County?
We don?t know the answer to that question, but we do know that the current housing market is returning to healthy levels and is again, finally, contributing positively to the United States Gross Domestic Product. This is a start, a good one, and we hope that growth will continue with solid fundamentals and an eye to long-term stability over short-term profit.
colorado rockies moonshine news channel 4 radar weather weather channel lionel richie mike brown
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.