Realty Bytes August 2009

Realty Bytes August 2009:

Why is the bottom of the market so elusive?


The Rhode Island Real Estate market turned down in late 2005. Yes we have been in this market correction for almost four years. The rest of the country has been in this cycle since late 2006 early 2007. Obviously, all markets are local and there are exceptions to these general observations. Some markets like Detroit have been weak for a longer time, and other markets like North Dakota have not seen any down turn at all. Unfortunately, that is not the case in Rhode Island. From the market price peak of over $275,000 to a mean value below $200,000, the change in the market has been huge. Many people have no equity, or ‘negative equity.’ They owe more than the property is worth.

The most common question that we as Realtors are asked: “Are we at the bottom?” In all candor, we really do not know. We would like to think we are, or are on either side of it. The recent numbers of sales activity suggest that the market is improving with more sales, although the prices have continued to lower. Additionally, we will not know that we have hit bottom until we are beyond it. It is a rear view mirror event. Only after you have passed through it do you really know that you have reached it.

The challenging question is not whether we have seen bottom, but rather why is it so elusive? Why has this cycle been so long and the distance between peak and trough been so great?

The answers to both questions are intertwined. Because we had gone so high, as the result of inexpensive and easy credit, the correction is greater than it might have otherwise been. Anyone could get a mortgage and credit was so free flowing that you really did not need to be able to afford the mortgage. The assumption was that prices would continue to escalate, or your income would go up, or your lender would reduce payments. Rarely was there a conversation of ‘ability to afford to pay for the property long term. If you could not afford the month payment, you would just flip it. Obviously those assumptions were and are not sustainable.

With that as a backdrop, we had market and value exuberance that resulted in very high average sales prices. The peak was really high. When we began correcting the lenders process for underwriting mortgages became so rigorous, the majority of people would not qualify to refinance. Then we have the new appraisal rules, requiring direct comparables within 90 days. Mortgage denials became the norm, not the exceptions.

In Rhode Island almost 40 percent of our sales currently are distressed sales, either foreclosures are short sales. This has further reduced average price. Also short sale is an oxymoron. It should be called a LFS; Long Frustrating Sale. The average conventional transaction closes in 45 to 60 days. It takes, on average 9 and half weeks, to get a simple response to a short sale offer. That response could be a rejection or a counter instead of an acceptance. It takes months longer to close.

If is difficult to have price stabilization with so many short sales in the market that are never resolved. There is conversation within the industry that prices would stabilize more quickly if we have a 7 day response time for all offers. Cut the buyers loose and let them purchase something else. It is a total lack of common sense.

Appraisal issues continue to retard any stabilization. Many transactions are falling apart because the underwriters and credit managers are questioning the appraisals. It is difficult to find perfect matches that are only 90 days old. Then when the transaction falls apart, there is one less closed sale to use in other appraisals. It is a downward spiral.
Another lack of common sense.

Many potential buyers are also on the sidelines, wanting to make sure we hit bottom before they purchase. This is understandable and difficult to accomplish. Where is the bottom? Is this the time to buy? Historically low interests, low prices, huge inventory and the $8000 first time home buyer tax credit are all strong incentives. With all of those elements, some buyers are still waiting.

So far we have discussed the challenges in the real estate market. We cannot ignore the larger economic climate. The unemployment rate is a huge challenge. Over 70000 Rhode Islanders are looking for work. Those people need jobs to stay in their homes, much less buy other homes. Job creation is key to recovery.

It is our observation that MBTA rail service to Green Airport, (and Wickford later), will do a lot to stabilize price. Average price in Boston is approximately $373,000, in Rhode Island it is approximately $200,000. That is a huge difference between markets an hour apart. We are confident the rail service will go a long way to stabilize price.

So there you have it. It is elusive, but on the horizon. We are just not sure how far the horizon actually is.