House Prices Will Continue To Fall

Posted by Joe Manausa on Wednesday, November 24th, 2010 at 11:17am.

House prices will continue to fall until local population levels rise high enough to create a demand for the glut of homes.

Unfortunately, house prices will continue to fall for quite some time. The imbalance between housing supply and demand can only be cured by an increase in the number of people wanting to live in Tallahassee houses, not by shifting people from the leasing side of the market to the owning side of the market.

When I read national real estate reports talk about the real estate recovery hinging on interest rates, tax incentives,  and even on consumer confidence, I ask myself ...

Where Are These Buyers Living Right Now?

Falling House Prices ImageI mean after all, we have a simple problem of falling house prices due to an over-supply in real estate. All those previously mentioned things are great stimulants for demand, but I'm not so sure that real estate is any different than other commodities. If there is too much supply, you must "grow" the demand side. A shift just isn't going to help.

A shift occurs when tenants become owners or when owners become tenants. Nothing changes in the market in terms of consumption or supply and demand, because the "resident count" does not change. Getting all the people in Southwood to move to Killearn Estates is not going to positively affect Tallahassee house prices either. We need more residents in our local markets in order to consume the glut of homes for sale before the housing market  truly embraces a recovery.

3 Possible Solutions For Falling House Prices

The way I see it, there are only 3 ways to fix our current situation. They are:
  1. Get more people to move to Tallahassee - Currently, Tallahassee is not growing. It historically has grown by less than 2 percent each year (and that is why the additional homes had been built), but experts believe that growth will be minimal for the next few years (and last year Tallahassee actually saw a reduction in the population). If you are in another market area, what is your population growth doing?
  2. Encourage a lower per-capita rate in each home - Other than encouraging our children to move-out and get their own housing, what can we persuade parents to do to help-out in this difficult market. Maybe create a colony for 16-18 year old children? [note: Sarcasm]
  3. Destroy existing homes - This option would have been a great federal program (rather than the Homebuyer Tax Credit), as it would have had an immediate impact on the supply of homes in Tallahassee. The government could have executed a strategic plan to buy homes in all price ranges, destroy them, and then hold the remaining lots until they could be resold for growth in the future. This would have saved the government money and fixed house prices much quicker.

Why Demand Stimulants Won't Fix The Issue Of Consumption

When you create a stimulant, you encourage people to do something. Other than creating more people who need more housing though, these fixes will really just shift the housing market. Tenants who are encouraged to buy a home do so by vacating a rental property. In the market place, a vacant "for sale" home is replaced by a vacant "for rent" home. The long-term affect on the market is nil.

Unless we see our societal morals change, option #2 is not going to happen. And the Federal Government has already failed us. It dumped its load of money on the market (for a temporary reprieve of current market conditions), and thus we cannot expect a smart solution (like #3) to ever come about. This leaves us with option #1; we have to grow our way out of the current over-supply of homes.

Population growth has been the traditional solution to falling house prices due to glut conditions. More people move to Tallahassee and either buy or rent a home (or apartment/condo/etc.), and thus we chisel away at supply. Last year, Tallahassee did not grow and most of the State of Florida saw similar drops in population. How are you going to stimulate somebody to buy a home if they are moving away?

How To Determine What Is Going To Happen To House Prices

Believe it or not, this is relatively simple. How much supply is on hand? All you have to do is look at existing supply levels and then look at population growth estimates. If your local area has more people moving in then are moving out, you can determine a consumption rate. Then, looking at your current supply of homes, you can estimate a likely market equilibrium date.

In Tallahassee, historical growth rates would have our city grow by 3,100 people this year. Considering our household density level is about 2.17, that historical growth would have consumed an additional 1,429 homes from the market. This would represent more than 1/3rd of the glut of homes that exist on the market and in our shadow inventory of homes, so all we really need is to see a return to our historical rate of population growth and our housing problem will be fixed within 3 years.

But last year saw an unprecedented reduction in our population, so we saw no movement, no relief for our house prices or the oversupply of homes that exist in Tallahassee. We must push our elected officials to create economic opportunity in our area, and we should emphasize growing our universities and colleges here in Tallahassee. With the pre-paid college program, there are over 1 Million kids ready to head off to school. We should be going after them as the quickest solution to the real estate problems that plaque Tallahassee.

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

1 Response to "House Prices Will Continue To Fall"

Joe Manausa, MBA wrote: Thanks for including it at your site Miriam.

Posted on Tuesday, November 30th, 2010 at 9:13am.

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