By Mike Turner
Well, if you read the paper or listen to the news, you’ve likely heard this headline on the real estate market recently.
“Home Sales Plunge to Lowest Number in 15 years,” “With the New Slow Down, Economists Predict a Double Dip in Home Market,” “Buyers Afraid to Buy in Shaky Market.”
You should expect to see more of the same headlines in September as well. The reason is that home sales are WAY down, nationally and locally. The reason for the market slow down should not be a surprise to market experts, but for some reason nobody is talking about the real cause. Government Intervention.
The government intervention pushed many buyers who likely had plans to purchase within the year to complete their purchase in the first 2 quarters of the year. Buyers had to be in contract to purchase by the end of April and had to close on their home by the end of June. This gave the local and national economy a nice little boost going into summer. It also burned up a lot of foreclosure supply sitting on the market, which was desperately needed.
But in some ways the Tax Credit for home buyers had an unexpected negative effect, starting with Consumer Confidence. I believe that markets are often dictated by consumer confidence. If everyone thinks and hears good news about the stock market or real estate, they are more inclined to invest their hard earned money. If they hear bad news all the time, they get more cautious and the market suffers from it.
The first time home buyer tax credit helped a lot of people, but it also has forced a negative effect on the market that MOST did not see coming. This was caused by focusing the tax incentives primarily on first time buyers.
When the Government focused the tax incentives on first time buyers (there were some incentives for other buyers, but they were limited and much harder to qualify for), they unwittingly lowered the home prices all across the country.
Everyone expected the tax credit to help boost home prices with the new demand, but since it was first time home buyers who were purchasing the majority of homes on the market, incentivized by $8,000 cash, and government backed financing with little or no money down, first time buyers (or any buyer who had not owned a home in 3 years) went out in droves and bought a home.
This all sounds good until you realize how the real estate industry tracks homes prices in the US. They take an average of all the homes sold and compare to previous months or years.
Well ask yourself this important question: What would happen if primarily first time home buyers, (who purchase the Starter/Low Priced homes on the market), bought most of the homes in a given period of time?
You guessed it. The Average Price would go down, probably by a lot. So, in the midst of all the good news about how home sales were way up in the first 2 quarters of 2010, you also got many reports that home prices were falling, rapidly.
Here in my local market in SW Idaho, our market showed a 15% drop in home prices in the first half of the year. OUCH. That does not do much for consumer confidence. Do you want to buy a home if home prices appear to be falling dramatically?
So the tax credit being focused for buyers buying lower priced homes helped push home prices down statistically. The reality is that home prices did not fall much or at all during that time, and if you were one of those frantic buyers last spring looking for a home, you would agree that the market was very competitive and you often had to give the seller what they wanted or more just to secure a property.
Even though the real estate market has strengthened considerably in 2010 with the increase in Demand, the common method for tracking home prices (average sales price) has shown weakening in home prices. This has frightened buyers who are waiting on the fence to purchase.
This whole problem could have been avoided if the government tax credit plan had been more balanced to all home buyers, as it would have kept the long standing average sales price stats reporting more accurately. As it is right now, it is skewed because of government intervention.
The hope with the tax credit benefits expiring this summer was that the momentum it caused would carry through the rest of the summer and into fall. Now the momentum has been lost. Because on top of the home prices being artificially pushed down during the spring, now the home sales are way down because buyers either took advantage of the tax credit and already bought their home this year, or they have been scared into hiding with reports that prices are still dropping.
The funny thing is that even though the nation experienced record lows in home sales in July and August of 2010, they are seeing dramatic gains in home prices. There have been a lot of smart people scratching their heads in bewilderment because they don’t understand how, with the decrease in demand, sales prices would go up.
The answer again can be determined by looking at the tax credit. First time buyers already bought their home this year. So even though we are seeing record low numbers in demand from home buyers, home prices are soaring up because now it is move-up, and luxury home buyers who are buying homes, and NOT first time buyers. This, again, artificially alters the average home sales statistic.
See Chart 1 - 2010 home price chart for Ada County, Idaho.
See how home prices bottomed out this spring and shot up just recently. This is all because of the tax credit phenomenon. This isn’t true for every market, but it is definitely the case for the Boise area market.
Now I am not saying the tax credit was a bad thing. In fact, I would argue it was one of the best stimulus ideas our law makers came up with to date. But due to how my industry tracks and then reports to the media on home prices, it has caused some unfortunate misreporting of the real estate market’s health.
The best way, in my opinion, to track the true health of a real estate market is to look at both Supply and Demand stats at the same time, rather than one figure individually, or taking averages.
For example, one of my favorite stats is called Selling Odds, because it calculates both Inventory (Supply) and Home Sales (Demand) together. So, hypothetically, if there were 100 homes for sale in a marketplace and 20 homes sold in that month, you would divide 100 by 20 = 5 months of supply, meaning if nothing changed and the market continued unchanged, it would run out of inventory in 5 months. Tracking this monthly helps us see trends on the market.
A SIX MONTH supply is considered a healthy balanced market by most experts. Less than 6 months is considered a Sellers’ Market, and any more than 6 months is considered a Buyers’ market.
See Chart 2 – Selling Odds for Ada County Idaho for 2010.
Be sure you notice how low the number got in spring (Below 6 months of inventory), which is arguably the strongest this market has been in 4 years. Yet the average home price stat went down (from the tax credit phenomenon) and the media totally misreported how good the market was during that time.
Even with the sales numbers really down in July, the Boise market is showing just a 7 month selling average, which is not bad, considering in February of 2010 it was 11.4 months.
Another important stat to watch is Pendings, because real estate reporting is always a little behind the times. Meaning, it often takes 1-2 months or more to close on a house when you purchase, so increased buying activity in August 2010 will not be realized statistically until September and October. Tracking the pending list from month to month helps one figure out what to expect for future months.
The pending stats for Ada County, for example, were much lower in June and July of 2010, which led to lower sold statistics for July and August. There is a slight increase in pending properties for August of 2010 compared to July, so look for slightly better numbers going into September and October.
Because of all the government intervention in the real estate market for 2010 (by focusing incentives primarily for one sector of the buying population), it has changed the accuracy of real estate market statistics and reporting, and has led to artificially induced negative reports on the market, which has hurt consumer confidence for the real estate market.
Smart consumers and investors will need to do more in-depth research to determine the true health of the market, and not rely solely on past industry standards and methods for measuring market health such as Average Home Price Stats.
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