February 2, 2012 Blaine Miller — President, Modern Insights
This spring is shaping up to be one of the best markets home sellers have seen in years. Sellers have been getting mauled in a merciless buyer’s market that has persisted for 3 long years – but this spring, things are changing. While the housing market is far from turning into a seller’s market, sellers will be on a more equal footing with buyers – presenting sellers with a great opportunity to get their homes sold.
Demand is Rising
NAR recently reported that the Seasonally Adjusted Annual Rate (SAAR) of existing home sales rose 5% to 4.61 million. This is up significantly from its 2010 lows, indicating an upward trend. At the same time, as the chart shows, a SAAR of 5 million represents a line of significant historical resistance and should be respected (which is a topic for another discussion). Given the economic fundamentals, a SAAR of over 4 million should be welcomed and viewed as an opportunity.
Inventory is Falling
NAR also indicated that the inventory of unsold homes fell to 2.38 million in December of 2011, leaving the market with about a 6.2 month’s supply. As we can see, the month’s supply has fallen substantially over the last 6 months and is finally getting into a region indicative of price stability. While the market is quite a long way from achieving appreciating prices, price stability will give sellers a great opportunity to catch up to what has been a depreciating market.
On January 31st, the Case Schiller home price index fell 3.7%. The CoreLogic Real Home Price Index, shown above, also declined. Many sellers may view this as a negative, but it is important to keep in mind that home prices are a lagging indicator. Home prices fall after supply has outpaced demand.
Another leading indicator pointing towards price stability is the average price of new listings. This has risen substantially over the last several months, after falling through the second half of 2011. When agents sense weakness this number will be falling; and when they sense market strength, this number tends to rise.
A Cautionary Note
Many real estate agents, brokers, investors, and market watchers will take this period of relative strength in the housing market as proof that the smoke has cleared, the market is out of the woods, and headed towards a V-shaped recovery. This would be a very dangerous assumption for a number of reasons:
- The fundamentals of the housing market remain extremely challenged as household wealth and income levels continue to decline. This is will make it extremely difficult to push the sales rate (SAAR) above 5 million.
- There exists a large supply of future inventory coming into the pipeline from foreclosures that were held up in litigation in 2011, a high rate of seriously delinquent loans, and homebuilders who must build out from under excess land inventories.
- Federal programs to convert foreclosure inventory into rental units will not be as successful as advertised.
- Credit remains constrained and many sectors of the real estate market, particularly second homes and luxury housing, have limited access to credit which will act to keep inventory levels persistently high.
- In many markets, a large percentage of home sales are distressed sales to investors without financing (all cash). These types of buyers come out during periods of market duress and go away when the market strengthens.
- Home prices have fallen to a critical juncture. As the chart of Real Home Prices (shown above) demonstrates, home prices are clinging precariously to a decades old trend line; if this is broken, prices will likely fall further. Chances are high this will occur – however, the timing of this decline will likely prove difficult to pin-point given all of the governmental intervention in the market.
In summary, if you are a seller and need to sell your home or have been waiting for a better time to sell, an excellent window of opportunity is presenting itself – strike while the iron is hot. The housing market is going to be a bumpy, choppy ride going forward where the balance of power will be swinging wildly between buyer and seller.