I have been doing quite a bit of research into the real estate shadow inventory in Tallahassee in an effort to gain a better understanding of just how long the real estate recovery is going to take. When I first published an empirical market forecast regarding a "return to normal" by 2013, I had a few flaws in my assumptions.
I still stand by my model, as it is simple and fairly easy to implement. The assumptions that I used included a continuation of our population growth rate as well as normal open market conditions. As we all know by now, those open market conditions have been disregarded by significant government involvement in the mortgage market, and our population growth did not occur last year.
The real estate forecasting graph below was created on September 23, 2008 and published the next day. It demonstrated the expected number of annual home sales for the current year of 2008 through to the end of 2011. Additionally, the article explained that 2012 or 2013 would be the first year that home sales occurred at the frequency in which Tallahassee was accustomed to seeing.
When we observe the total number of sales in the Tallahassee housing market, the forecast for 2008 was spot-on, but the forecast for 2009 and 2010 had not considered the First Time Homebuyer Tax Credit or the continuation tax credit. The forecast in the graph above ended up being about 10% too low (meaning the market did better than expected).
Were I to update the model with the new information, including the population adjustments, our forecast for normalized market conditions would be extended beyond 2015. So what exactly is causing the slow return and why is my model forecasting results that seem contrary to what is being published by most REALTORS® and by the NAR?
Real Estate Supply And Demand
There is a gross imbalance right now between supply and demand. Normal market conditions require 5 to 6 months of supply (see current levels of real estate supply in Tallahassee) of homes, yet we are well over 12 months of supply in the KNOWN listings of homes for sale in Tallahassee. The shadow inventory has another 2 or more years worth of supply laying dormant right now.
This over abundance of supply means that pricing pressures will exist for a minimum of three more years. Unless we see a major improvement in the population growth rate in Tallahassee (in order to consume the excess number of homes for sale), our recovery could easily extend another 7 to 10 years.
Home Sellers Need To Make A Decision Today
This information is critical for today's home sellers to understand. Currently, 60% of the homes listed for sale are going to go full term on their marketing agreements and will not sell. That means most home sellers will FAIL TO SELL THEIR HOMES mostly because there are so many more sellers in the housing market than there are buyers.
Home sellers need to decide whether they want to stay or go. If they are going to go, they should hire the company that can get them out of their home immediately, as falling prices mean their best deal will occur now, not next month, next year, or even three years from now. Take advantage of the summer market and get rid of the home today.
Or, choose to stay for the next 7 to 10 years. I am still very bullish on the future of real estate in Tallahassee. I think we will work through our tough economic issues and Tallahassee will rebound and will grow again. When our growth reaches a level where we have consumed the glut of homes for sale in Tallahassee, new homes will be needed to keep up with the increased population. The cost of building those homes will be much higher than in the past, so home values will be pulled up towards "cost."
To make my advice as clear as possible, Sellers need to sell their homes quickly in order to get the best price possible for the foreseeable future. Any delay will cause the home seller to get a reduced price. So, do you want to move?
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.