Housing Cooldown Continues
A: Existing Home Sales slumped to the lowest level since January 2004 and the inventory of unsold homes climbed to a new record, further indicating that the national housing cooldown is continuing. If we were to analyze the anatomy of a local housing market cooling down, what would it look like? Why would it happen? What forces are playing a role? Who are the winners and who are the losers? These are some of the questions that come to mind in the hopes of finding the best way to invest in housing cooldown!
According to Yahoo Finance:
The National Association of Realtors reported Wednesday that sales of existing homes and condominiums dropped by 4.1 percent in July from June to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004. The inventory of unsold homes in July rose to a record high of 3.86 million. That represents a supply of homes still available for 7.3 percent of a month. That is the longest period to exhaust the supply of home since the spring of 1993.
HOUSING COOLDOWN: Well, I would describe it as a period of time in a particular local market where a combination of rising inventory, dampenening buyer demand, and increasing time on market occur at the same time. What forces are driving these three situations can vary, but the effect seems pretty obvious. The length of the cooldown is impossible to predict and is different for every market (For example: New York City's rising rents and shrinking vacancy rate are sure to help limit the length of a cooldown than say a city such as Miami that is ripe with speculative investors and new developments).
WHY IT HAPPENS
First of all, corrections in the housing market are completely normal and necessary to ensure longer term sustainable growth. For sake of dicussion, here are a few reasons why a housing market cools down.
1. Tightening Monetary Policy: As money gets more expensive to borrow, affordability drops and homeowners are forced to lower their budgets. Generally speaking, housing booms occur in historically low interest rate environments providing buyers with higher affordability. As buyer demand dampens, sellers are forced to lower their prices and/or respond to low ball offers.
2. Rising Inventory: As with most markets, when a boom becomes clear speculative investors jump in with the hopes of 'riding the wave'. Housing was no different over the course of the past few years. The combination of the average speculative investor (a.k.a. "real estate flipper") plus all the new developers with projects already underway are contributing to the # of sellers on the market. As inventory rises, buyers get more control with more choices for them and more competition amongst sellers. As long as this dynamic exists, the cooldown will continue.
3. Desperate Sellers: Due to in-building/general market competition, those sellers in dire financial situations will be forced to lower their asking prices to avoid going into foreclosure; Mis-management of funds, bad lending product decisions (3YR I/O Loan), or sudden layoff from work can all turn you into a desperate seller!
Now that we know some reasons why, let's see how it works in the real world:
SELLER OWNS 1BR/1BTH ---> LAST BLDG 1BR/1BTH SOLD FOR $575,000 ---> 2 1BR/1BTH's ON MARKET NOW ASKING $595,000 ---> SELLER PRICES AT $590,000 ---> 8 WEEKS LATER NO BITES ---> SELLER LOWERS PRICE TO $575,000 ---> 3 WEEKS LATER NO BITES ---> SELLER LOWERS TO $550,000 ---> BUYERS REALIZE A WEAK SELLER ---> 1 BUYER SUBMITS $520,000 BID ---> SELLER ACCEPTS ---> NOW, LAST BLDG 1BR/1BTH COMP IS $520,000 ---> OTHER SELLERS MUST COMPENSATE & LOWER PRICE TO $550,000!
If you don't think this situation exists and will continue to exist than you are living in a fantasy world. As you browse apartment inventory, you MUST keep tabs on those apartments that you really liked, but were a bit too expensive at the time you saw it. Have you checked the asking price lately? Is it lower?
And another thing, do NOT be afraid of submitting your highest offer that you can afford! Just disclose this when you submit the bid and tell them it is a 'take it or leave it' offer!
WINNERS & LOSERS
First the winners. Savvy buyers who know the inventory in their target price point and understand how to seek value based on permanent features such as location, views/light, and raw space will find real estate success long term by buying in cooling housing markets. This is also known as Contrarian investing, meaning you are buying into a market that is down and out. Now I wouldnt call the current NYC housing market as down and out, but buyers definitely have more control now and there are great deals popping up! Are you savvy enough to find the wreck that is asking $200 a sft less than every other apartment for sale in the same building?
Now the losers. Those current homeowners who will be forced to sell due to financial mismanagement/bad decisions, job loss or transfer, or lack of knowledge of lending product taken out. All of these 'losing characteristics' have a FINANCIAL ASPECT in common with each other whether it be your job and some type of sudden change, your own financial well being or lack thereof, or the financing product you took out. See a trend? The only way to sell quickly in a cooling housing market is to lower your price aggressively; not the best strategy for those with lofty investment goals! Ideally you want to have the choice of WHEN you sell your property, which leaves recognizing the selling opportunity as the next project on the list!
Add to Newsvine
Comments (2)
Noah: Can you comment on today's NY Post article, "HELTER SHELTER: SELLERS, BUILDERS HIT BY BIG APPLE DOWNTURN." Thanks.
Posted by G W B | August 28, 2006 10:58 PM
GWB,
Pretty much what I mention in this post here on UrbanDigs. Reality is settling in, especially in the high end and the gap between prices that sellers think their home is worth and what the apartment actually sells for on the open market is widening.
Not surprising. Fundamentally housing has some rough roads ahead and buyers are aware of this. Speculative activity is pretty much gone completely and that lack of demand leaves only worried, cautious buyers that are shrinking the buyer pool. Paying close to $1000 a square foot is a luxury that not many people are willing to buy into right now, given the signals of the bumpy road ahead. While a correction is underway and whose end is still unknown, it will be healthy for the housing market long term. Its short term I'm worried about as this is my first experience with these types of fundamentals following a record run in housing prices that was obviously unsustainable and a one time phenomenon due to the fed's policy actions in reaction to the dot com bust.
I would expect more of the same going into the next 1-2 years, with a natural correction running its course. Thing is, when housing makes that turn, its very hard to swing back around (unlike stocks that are more liquid and can move based on news alone) so what you are seeing now is likely to continue until it plays its course.
I'm still waiting for the short term buyers over the past 3 years who paid much higher prices than now and rationalized the purchase by taking out a interest only short term ARM, to play out when the're lending product adjusts. That, combined with a ton of new inventory set to hit the market will obviously have a domino effect on what that article is stating.
Posted by Noah | August 29, 2006 2:35 AM