Yesterday, I was very fortunate to attend a nice afternoon round-table with the top real estate agents in Tallahassee. We spoke of the many changes that we are seeing in the Tallahassee real estate market, and many interesting views were shared.
Invariably, the conversation kept returning to the subject of real estate market conditions and the abundance of distressed properties that are coming into the market. It seems that many of these top real estate professionals had read a fresh news story that was picked up by the Associated Press regarding the threat of a double-dip in the real estate market.
The article reported:
Consumers are taking their time following the extension of a tax credit deadline, and that is draining momentum from the summer's recovery, according to data Tuesday from the National Association of Realtors.
So what this article is saying is that things are going to cool off in the housing market because the thrill of a tax-credit is waning and the tax credit itself will be expiring by the end of April. Once the excitement of free money dies, as well as the source of the free money expires, we will be back down where we were before the first tax credit was announced.
I'm not so sure that they understand the big picture.
Supply And Demand Are Important In Real Estate Too
I think the real issue that we should be studying is in regards to how the recovery is going to develop. Are we going to see a "V" shaped recovery, one in which the market bottom has been reached and we will see the housing market continue to move in an upwards direction. Or, will it be more of a "U" shaped recovery, where we spend some time at market bottom, only to see growth after "paying our dues" for a while at the bottom.
There are many more influencers affecting the housing market than just the Homebuyer Tax Credit. Housing supply levels are dropping, but they are still much higher than the market requires for balance between buyers and sellers. The market is still skewed to the Buyers' side, meaning there is pressure on pricing and buyers have the luxury of selection.
The very fact that the housing market supply-side is decentralized and disjointed means that market forces are highly predictable. If we pay close attention by studying the current trends in the housing market, we will know as changes take place. To better understand this, let's look at an example.
What Would WalMart Do If They Were The Real Estate Market Retailer
What does retail giant WalMart do when it has put a product on its shelf that is failing to sell? Any five-year old who watches the television will tell you they "slash prices." Walmart will drop prices on the product until price alone will stimulate demand.
As a central player in the retail industry, Walmart has great influence on the retail supply side of the market. With their large market share, if they cut prices, everybody knows about it. Liquidating inventory for them is part of their central business plan.
But the housing market does not have a "corporate office." Homes are owned by individuals and the new construction side of the market rarely represents more than 1 in 5 homes sold. Even so, the new construction industry is also highly decentralized, with almost as many homebuilders as there are new homes built.
So prices in real estate can trend more fluidly than they do in other industries, because each price reduction is an individual decision made in some household in the real estate market. This fluidity allows real estate professionals who closely study the market to be able to project current and near-future market trends (my projection for 2009 in September of 2008 was spot on).
But we are about to experience a major change to this "fluidity" and it is entirely more significant than the Homebuyer Tax Credit!
Distressed Properties Will Centralize Pricing In The Housing Market
There is a Walmart looming around the corner in the real estate industry. This giant is going to come into the real estate market and play havoc on the traditional fluidity of pricing that we have enjoyed. Who is this real estate giant? What are they going to do?
The banks and investors who hold the mortgages on the 50+% of the housing market where negative equity positions exist will one day have to start making some decisions. It has been reported that more than 1 in 4 home loans in America are in default (distressed properties) and more than 1 in 2 owe more on the home than it is worth.
Banks have been slow to foreclose on these properties and the shadow inventory of distressed properties has been growing. In Tallahassee alone, we have reported that these homes number over 5,000 (which is more than a year's supply of housing). When the banks finally do decide to act o these, there actions could be swift.
If they take ownership of the large portion of these properties that will not be sold at foreclosure, then the real estate market will have a new centralized supplier which will very much parallel the giant retailer Walmart. They will hold a large inventory of homes they do not want, and they will slash prices to rid themselves of these troublesome assets.
Bank Behavior Will Determine The Shape Of The Housing Market Recovery
So back to our thoughts of "U" shaped versus "V" shaped recoveries. If banks act swiftly, we will see a "V" shaped recovery. Prices will be slashed, buyers will flood the market to take advantage of "deals," and unit sales will soar. If banks act slowly, then I suspect we will spend some time at market bottom.
Prices will continue to decline, but unit sales should slump along between the levels that we saw at market bottom and the level that we are at now. This will continue as we work to consume not only the current glut of homes for sale, but also those that will move from the shadow inventory into the inventory of homes for sale in the active housing market.
So, keep your eyes on the banks. Their actions will tell us all we need to know about the near future of the housing market. Too much emphasis is being placed on the Homebuyer Tax Credit, as it has had a significant effect on the lower end of the market, and nearly no impact on the upper end of the market.
We can find evidence of this (in Tallahassee for example) with inventories dropping nicely in homes priced below $200,000. But the Homebuyer Tax Credit offers little incentive for somebody purchasing a more expensive home, so high-end homes will be facing pricing pressures until we see real estate inventories return to traditional 6 months supply levels.
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.