Today’s Case Shiller numbers show a mixed bag of data. There are some very strong indicators that the market is ready to break out; 8 cities were up over last month and the average annual appreciation was 4.5%. Moreover the monthly increase of .8% puts the average over the next 12 months at nearly 10%. These are pretty exciting figures. That said, the sales declines (NAR’s October pending sales were slowed down for the month) within the context of historically low interest rates, suggest something a bit less optimistic. So how is it our GDP was up 5% for the 3rd quarter yet home sales are not following along?
We have several factors at work affecting home sales and home value appreciation. First, while it is true the economy appears to be improving rapidly, the Federal Reserve has chosen to keep rates down for the foreseeable future. Why? The likely answer is that while the economy is growing, inflation is not and most specifically wage inflation. Without income growth, homes cannot appreciate. Secondly available inventory is low and is restricting buying activity. Ask any home lender/mortgage broker and they will tell you they have files filled with preapproval letters but their clients cannot find homes to buy. Further, with new home construction only modestly picking up, the availability of new homes is contributing rather than easing the low inventory concern (search available inventory here). New homes are often a catalyst for existing homeowners to “sell-to-buy.” The dearth of new homes, especially in “In town” locations most popular with the ever growing Millennial demographic buyer pool, is further exacerbating the sense that there is nothing to buy. Without adequate inventory, sales cannot accelerate. And don’t forget that the participation of Wall Street in the residential home rental market (ie: Blackstone) means that 100,000’s of homes that could be up for sale, are not, rather they are locked up as rentals in REIT’s (Real Estate Investment Trusts). REIT’s cannot sell property as easily as you or I, since they have restrictions placed on them within the rules to qualify as a REIT.
So where does that leave us and what should we expect going forward in 2015? More of the same is what I expect. I feel there is a tension between buyers and sellers favoring neither and leaving both frustrated. Sellers want their appreciation and in fact many need it as there are still a lot of homes at or just under water, owing more than they can sell for after costs and commissions. Buyers for their part, want nice properties and will pay a premium for these, but these are in ever short supply. This in part can be attributed to the lack of disposable income to be used on home improvement, so many homes currently on the market have perhaps been a little more neglected over the past 7 years than they might otherwise have been, making them less desirable to prospective buyers. As the economy improves so will the stock prices of home improvement companies Home Depot and Lowes and suppliers like Masco. Interestingly this could mean better improved homes coming up for sale or it could mean fewer sellers as more people opt to fix their existing home rather than sell and try to buy from a very limited inventory of available homes. This in turn will continue the trend of tight inventory and slower sales but hopefully fuel a little appreciation to motivate would be sellers to list and sell. One last thought, a reminder really, that real estate is always local. What happens in Park City, Utah may have little bearing on Palm Springs and what’s happening in Brentwood, Ca little effect on Thousand Oaks where a leading employer is downsizing.
Lastly I would suggest that if you are in the market to buy or sell, finding a local area, full time, experienced real estate professional will never be more important than it is today (click here to contact Tim). Even with all the online information, buyers and seller are best served by someone who can discern value; recognize opportunity, counsel accordingly and manage the process to a successful conclusion. The more confusing the marketplace, the more important your choice of Realtor becomes.