Real Estate Supply And Demand Tells All
We must always remember that real estate is ruled by supply and demand, just as is every other commodity that is market driven.
If one keeps a vigilant eye on the relationship between the supply and demand of homes for sale, then one should be able to clearly identify the near future movements of the the housing market.
When I wrote an article on the supply and demand for housing in Tallahassee back in 2008, I forecast-ed dropping prices due to oversupply. This was not rocket science, just a simple study of housing inventories.
Today's post is somewhat more complex, but if you take the time to fully understand what it demonstrates, then you will truly understand why home values will continue to drop. This is not your typical "REALTOR" blog article, rather it is a fair and accurate analysis of supply and demand in the Tallahassee housing market.
I received a great comment and question from long time reader "KD" yesterday that goes to the heart of Tallahassee real estate supply and demand. KD writes:
Hi Joe !As you can see, this is anecdotal evidence showing how the entire market really works. When buyers see value, they buy. When buyers question value, they stop buying. So lets evaluate the accuracy of KD's opinions.
I've been following your blog for some time now, and I read in a recent one that you believe there are steps lenders need to take to correct the market for the "move-up" buyer. After reading the blog I kept thinking, over and over, that there is still one other outstanding factor causing problems for every buyer across the board:
When the bubble started to inflate, house values sky rocketed. The prices went up by as much as 100% in some areas. This clearly priced a great many of the potential buyers out of the market. While the bubble has burst, and loan programs have tightened, the actual price of a home hasn't depreciated by the same rate it went up, in kind. Prices, even though they've fallen, still remain inflated against a standard appreciation rate.
A third part of the problem is the inflated price of a home. They're just not worth what is being claimed by owners or the market, as evidenced by the weak sales and the continuation of falling prices despite being told "we've reached the bottom"...Would you care to elaborate on this? KDPriced-Out Buyer
Real Estate Depreciation Must Bring Values Back In Line With Market Expectations
One significant point in KD's comment is that the actual price of a home hasn't depreciated by the same rate it went up. In order to test this statement, I used the data from Killearn Lakes that we have been examining over the past week or so. Due to the size of this Northeast Tallahassee neighborhood, I would think that it will be a fairly accurate reflection of the entire market.
Using just existing home sales that were "arms length," I was able to create a graphical representation of home values (the movement of the market) over the past 20 years.
This real estate graph is completely consistent with KD's observation of home values in Tallahassee. There is a lot going on in this graph, and I urge the reader to take the time to understand it.
The yellow diamonds are average home values plotted each month, going back to January 1991. The red, green, and blue lines are the 1, 5 and 10 year "average price trends" respectively. The red field graphs a 4% annual appreciation of home values (starting in January 1991) while the blue field represents the level where we expect the ten year average (the blue line) to fall.
So, in simple, if we look at the long-term average of 4% appreciation, then we would expect our red line in the graph to fall right on top of the red field, while we would expect the blue line to fall right on top of the blue field. You can see that this was the case from 1991 through 2003, then all heck broke loose.
Over Corrections Are The Norm In All Markets
Our graph above shows that our current values are about 7% higher than the traditional expected values, yet our ten year trend is 14% higher. This implies that we will see prices drop and stay down for some time if we have an expectation that our historical appreciation level will return.
And we do. Normal market cyclical movements usually contain "over corrections," just as well saw the market over correct on the way up, it most certainly is going to over correct on the way down. But this is all normal and good times will return.
Tallahassee's growth and employment have been stable for quite some time, certainly longer than my 20 years in the real estate business. This stability is the reason that I am bullish on long-term real estate valuations in Tallahassee and why Tallahassee has always been such a good real estate investment market. We must not forget that we are in a correction.
And more correction is needed, just as KD mentions in his comment. How do we know that more correction is coming?Let's just take a look at the current real estate supply and demand information for Tallahassee.
Readers need to remember that most real estate professionals consider 6.0 months of supply a "normal" level, where supply and demand are in balance. The numbers above show that Tallahassee housing is still over supplied, and it will take lower prices to encourage buyers back into the market.
Home Buyers Have Opportunity Now
As a final note for KD, home buyers have opportunity now. Real estate is different than most retail markets (where most of our readers consumer experience lies). Each home is priced by its owner, thus there are opportunities today. The "market" might be overpriced by 7% right now, but the reality is that some homes are overpriced by 20%, and some are priced correctly. Others are priced in between.
You can buy a home today so long as you are working with somebody that you know will look after your long term best interests. Buy a home at the "correct price," and you will be safe. Do not fall for the "7% off" mentality, meaning the value of the home is so much more important than the price.
Getting a homeowners who is 20% overpriced to drop 7% is not nearly as wise as paying full price for something that is priced correctly today. This is why we study real estate supply and demand and how we use it to buy and sell homes wisely.