Finally the winter is waning and spring is waxing! The real estate market wanes and waxes like the moon and ebbs and flows like the tide. 2007 will be no exception. This past winter has been particularly challenging as it started very gentle and February was brutally cold. The local real estate market has calmed down over the winter months, but the real indicators of the market are about the present themselves. Among the elements that impact the market are perception, the amount of inventory, the cost of mortgage money, the availability of money, the reasonableness of buyers and sellers, the number of foreclosures, and fundamental demographics. One must remember that real estate is local, and probably more local than any other financial indicator, because real estate is fixed. It is located where it is! Unlike buyer and sellers and their money, the real estate stays where it is. Sometimes we forget the most obvious things, simply because they are obvious; location, location, location.
Perception: How buyers, sellers, homeowners, renters, economists, reporters, and financial advisers perceive real estate impacts its value directly. Over the past year, and since August of 2005 in Rhode Island, real estate has lost some of its shine. Part of the reason is the fundamental of real estate. Price/Value ebb and flow. The value has been ebbing despite the fact that people need shelter. It is a basic human need. While value may be adjusting downward, the correction is modest. Moreover, as prices come down, more people can purchase homes. In short, it minimizes the over all change.
Amount of Inventory: The number of houses is lower right now than the end of last year, but we expect more houses to come on the market creating an oversupply. This will put additional pressure on prices.
Cost of Money: Thirty year fixed rate mortgages are still in the 6.2% range. This is very competitive, particularly for those of us who worked with 18-20% thirty year fixed rate mortgage back in the early 1980s. Projections for this year suggest that cost money will remain very competitive.
Availability of Money: Less money will be available because of the sub-prime mortgage crisis. Over the past ten years, people with poor credit and limited cash were able to obtain mortgage money based on non-verified information, i.e. income, cash on hand, etc. Many of these mortgages were adjustable rate mortgages. When the interest rate went up, the buyers could no longer afford to keep the property. This readily available supply of ‘easy’ money is gone. The net impact will be less money for first time and marginal buyers. People with good credit, will however, be able to find mortgage money to be there when they need it.
Reasonableness of Buyers and Sellers: The buyers have had a very good handle on the change in the market over the past year. The sellers have, however, been living in nostalgia. The values have corrected and many sellers believe that we are still in 2004. The difference in understanding of the market had lead to a communication gap. The sellers and buyers were speaking different languages. Average sales price went from $282,900 in 2005 to $282,500 in 2006, but the number of sales dropped from 10,000 single family homes to 8600. Many sellers have been unwilling to take less to sell their homes. Spring 2007 has suggested that sellers have the message and are speaking the language of the market. Fair value-fair price equal a sale.
The Number of Foreclosures: Unfortunately, we will have a record number of foreclosures this year. On one hand it provides buyers with a great opportunity to buy at less than fair market value. On the other, it will lower the average sales price after the post foreclosed property is sold. Additionally, it will cause some buyers to pause in anticipation that the market will correct further. For market analysis purposes, these transactions need to be put in appropriate context. They are not arms-length, fair market value transactions. The number of foreclosures does not speak to the human cost to those families who loose their homes.
Fundamental Demographics: All real estate is local. One must look at the demographics. Our population is stable and family size continues to shrink which increases the demand for housing. The number of new housing units in our area, while still increasing, is increasing at a much slower rate. Our value is also significantly less than metro Boston, fifty miles away. The creation of new jobs in Rhode Island has been encouraging as well. The aging of the population will also influence the health of our market.
In conclusion, the real estate market is leaping into spring. We will have some storms, but overall the real estate climate is going to be livable.
Ron Phipps, CRS, ePro, GRI
For more information please log onto www.phippsrealty.com
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