This is an update to the first blog post I ever made back in late 2007. Iâ€™ve added in some updates for todayâ€™s market (Dec 2008) in BOLD.
There are is a myriad number of factors that people claim steer the real estate market. Some of the factors I have heard of are area incomes not keeping pace with housing, rent to housing cost ratios, foreclosures, subprime loans, media scare tactics, over building, overpricing, unrealistic sellers, unrealistic buyers, unemployment rate, the overall economy, and the list goes on and on. While all of these factors are valid in one way or another (and I frequently write about each), they all go back to the simplest of economic theories that drives ALL of todayâ€™s markets: supply and demand.
The law of supply and demand states prices is pressured toward an equilibrium point, where supply and demand meet, illustrated below with a typical Economics 101 Supply and Demand chart.
Simply put: Â Â Â All other things being equalâ€¦
An increase in supply causes a decrease in price.
Â Â A decrease in demand causes a decrease in price
Â Â Â An increase in demand causes an increase in price
Â Â Â A decrease in supply causes an increase in price
As of the end of November 2007, there were a little over 26,000 homes for sale in the Orlando market of Orange and Seminole Counties. In the same month there were only 963 properties that sold. Down from an average of 1,636 homes sold per month between November 2006 and August 2007; illustrating the sharp drop in demand most likely caused by the implosion of the subprime mortgage market in September 2007. There is currently a 27 month supply of homes.
As of November 2008, there are now 24,408 homes for sale in the same area, with 1078 properties sold. It is interesting to note there was a steady upward trend in home sales from March of 08 thru too October 08, showing over a 37% increase in home sales from the same month last year. For a moment, I had thought we had turned the corner! Then October hit, the other shoe dropped in the credit crisis, a $700B bailout and the stock market crashing 50%+ was all over the pressâ€¦.people got scared, and rightfully so. Sales in September had reached a more normal 1400 homes a month, only to pull back over 20% by November. On a positive note, inventory is down to a 22.7 month supply of homes,
To put these numbers in perspective, the monthly inventory between Oct.Â 2002 to Oct. 2003 was always between 7,000 to 8,000 properties with an average of 1,860 properties selling per month, representing a market in equilibrium with a 4.3 month supply of homes.
Doing the math, if there are zero net additional homes that come onto the market (supply freezes), and demand for homes comes back to a normal rate of about 1,700 homes selling per month, it will take 10.5 months to sell off the excess home inventory down to a normal 8,000 units. Once this occurs, historical equilibrium will be reached and prices will stop being pressured downward.
Â Given the normal reasons for the rise in property supply; job relocations, growing or shrinking families, divorce, foreclosure, etc, more homes coming on the market should be expected. And while I personally believe the demand for homes must eventually come back to normal levels, there are still many buyers hesitant about buying in this market. Demand may remain at a low of only 1,000 units selling a month for the foreseeable future. These factors could mean prices will be pressured downward for some time, perhaps closer to 18-24 months.
Unfortunately my prediction is holding true, and the last 12 months have averaged about 1200 homes sold a month. There have of course been more properties put onto the market. There has been an explosion in short sale listings, plenty of bank owned foreclosures, and the normal everyday sellersâ€¦.some which have been listed since before I first wrote this 12 months ago! Luckily sales have outpaced inventory and the levels have been going down, at todayâ€™sâ€™ sales rate however (1200/mo on average) it will take 13 months to get down to â€œnormalâ€ levels of 8,000 units.
It should also be mentioned that November of 07â€™ had ~1800 homes under contract, while in 08â€™ that is up to 3326. This may be attributed to short sales as they can take 45-90 days to close, and over half of those may not get to closing, so add at least another 800 homes to the inventory number. There is also rumblings about Alt-A and Option ARMâ€™s re-setting in the next 12 months, causing a second wave of foreclosures over the next 6-12 months. These concerns are valid in my opinion, though I believe will be blunted by the fact many of these future foreclosures are todayâ€™s short sales. We are still 6 months away from the earliest I projected weâ€™d be out of the housing slump, unfortunately it looks like the groundhog got scared, and weâ€™ll be in for a longer winter. Donâ€™t look for a market rebound to occur for at least another 12 months.
Even with all of that, my colleagues and I are receiving more and more calls from real investors, with cash and an appetite for multiple rental properties. For the first time in MANY YEARS, these investors can make money renting single family homes. On many homes in many areas, it is now CHEAPER TO BUY than to rent, by a good margin too! I think when the bottom comes, it will bounce upward quickly. Today, only the amazing homes with the best prices and the marginal homes with amazing prices (foreclosures) are selling. The foreclosures are leading the market down in price and will continue to do so, but there is a LARGE pent up demand just waiting to buy, whenÂ that demand is released, I believe it will happen quickly. It will be interesting to see, and ridiculous deals will be made. Just know that the best homes will be sold in the blink of an eye. For the buyer in todayâ€™s market it comes down to whether or not you want to wait and hope for an amazing deal tomorrow, or settle for a good deal today. For the seller, it's whether or not you want to sell today and not make as much as you wanted, or sell tomorrow and make even less.
All that being said the real estate market is extremely local in nature, sometimes down to a particular neighborhood or even particular home. Some areas have a different supply than others, and some have different demand. There are always areas that are more desirable than others, and at different price points sellers tend to be able to hold out longer for the price they set. This explains why some areas like Winter Park have seen very little if any depreciation since 2005, while others have dropped in value as much as 30%!
Winter Park has now seen a good amount of depreciation and other areaâ€™s are down as much as 50%!
Only a local market evaluation, factoring your specific needs and time frames, can determine whether selling your home, or buying your next home, makes sense in todayâ€™s changing market. Â
You must ask yourself and your realtor some questions before making an educated, thought out decisionâ€¦â€¦
Should you Sell today or wait until the market gets better?
Â Â Â What is your motivation for selling?
Â Â Â How long can you really â€œwait it outâ€?
Â Â Â Will your home be worth more or less in 2,3,4,5 years?
Should you buy today, or wait for homes to come down more in price?
Â Â Â How long do you plan to live in the home?
How much of your quality of life depends on the ownership of a home?
Â Â Â How much will it cost you to rent vs. buy?
How much do you value stability; not having to move when landlords decide to no longer rent?
Can you comfortably afford your dream home today?
Will the perfect home you find today, still be available tomorrow?
When it is time for you to make your decision, whether selling or buying, I will be glad to offer my assistance, helping you determine what the market is doing in your specific neighborhood and whether it makes sense to buy now, or wait.