Lenn's blog about the "normal" high is must read for real estate pros, homeowners and those thinking of buying property. It really puts the housing market in perspective as to where it has been and where it likely is heading.
"HARD CORE REAL ESTATE TALK"
JUST WHAT IS THE "NORMAL HIGH" FOR RESIDENTIAL HOME VALUES?? What does it mean to real estate agents who depend on home sales for their income??
Many see the extreme highs of home prices in 2007 as "normal high". The question is, was that "normal". Or, is it simply wishful thinking???
THE BENEFIT OF HAVING AN INSTITUTIONAL MEMORY. Over the many years I've tracked market values for residential real estate, the yard-stick for projected appreciation was always annual inflation rates, which, in my area, on average were about 3%. You could actually project that as a likely value metric for cities and counties in Virginia, somewhat less in Maryland.
I recall the last "bubble" in our area of Maryland and Northern Virginia, the mid to late 1980s when the real "normal" price appreciation was about 3% but then fell through the floor in 1989-1992-3.
Montgomery County MD lost about 15% of market value.
Prince George's County MD gained about 7.5% of market value.
Northern Virginia lost about 20% of market value.
The above are ALL FROM MEMORY.
In the early 1990s, home owner/sellers wanted to price their homes for
sale based on what homes in their neighborhood had sold for. "But, there is a house in the next block that sold for $300,000". You're saying my home is worth only $250,000 today???" Of course, the house in the next block sold before the real estate crash of 1998-2002, led by the Savings & Loan scandals. Even when, in those days, a CMA could consider properties sold in the previous year, home owners were quite disappointed (and often angry) when they were shown the facts of homes previously sold in their community. I was a heavy listing agent in those days and many homes I sold were owned by banks (sound familiar?) that had foreclosed on new home builders who went under.
THE MARKET FACTS OF TODAY ARE FAR WORSE FOR OWNERS WHO WANT/NEED TO SELL.
The glut of bank owned homes and short sales is just the tip of the ice burg. The real "SHADOW INVENTORY" is, IMO, the tremendous number of homes owned by folks who would like to sell but are so upside down with negative equity that they cannot sell unless they have the resources to bring many $Thousands of Dollars to the settlement table.
One of my referral partners recently sold a modest town home, $230,000, in Howard County, MD where the seller brought $35,000 to the settlement table. Sad indeed. The seller had a choice. Sell with a significant loss or forgo a wonderful job opportunity in another state with a huge increase in income. Further, he was smart enough to know that he would get a great price opportunity to buy in his new location in Utah. I referred him to a wonderful buyer's agent there and he did buy about twice the home he had in MD for about the same price.
WHO WANTS TO PREDICT THE FUTURE??? CNN Money suggests that “Home prices may not return to peak until 2023,” CNN Money seeks to define "normal" for the housing market. They reference a "normal" metric of 2007. While I can't predict the future, I can examine the history. 2007 was, IMO, not normal in any way.
SO WHAT'S NORMAL, LENN? I believe that the "normal high" was about 2003-2004. I don't believe the highs of 2007 were normal at all. 2007 was a pure bubble, not in any way normal and totally interest rate driven, "Thank you Mr. Greenspan". I've been suggesting, when asked, that IMO, and I make it clear that it's just my opinion, that it will be about 10 years for the real estate market to recover. In that 10 years, I don't expect home values to get back to the 2007 highs, but only to what would have been the value today going back to 2003 with normal appreciation, about 3% per year.
WHAT HAPPENED TO OUR "MOVE UP" BUYERS?? Before we recover sufficient equity for our MOVE-UP HOME SELLER/BUYER market to return, their present homes will need to have sufficient equity to permit them to at least break even when they sell. Folks can't buy if they can't sell first. THAT is an economic fact that experienced agents know. NO! SHORT SALES ARE NOT THE SOLUTION FOR THE MOVE-UP HOME SELLER/BUYER.
Who are these "move-up buyers"?
Home owners who have outgrown the condo or town home or small single.
Home owners who have children and want to buy into a different school district.
Home owners who have changed jobs and need to relocate closer to the employment location.
Home owners who have retired and wish to move into a smaller home.
Home owners who need a larger home to accommodate children.
Home owners whose children have grown and moved on.
Home owners whose children are older and need a room of their own.
Home owners who need a larger home to accommodate extended family members.
Home owners who wish to sell the existing property and build a new home.
THE LOSS OF THE MOVE-UP MARKET HAS BEEN A SEVERE
FINANCIAL LOSS TO MANY REAL ESTATE AGENTS.
SIMPLE ARITHMETIC. With a normal appreciation of 3% on an annual basis, a home that was purchased in 2003 for $350,000 would have a market value of $470,370 in 2013. That's about $120,000 of home equity. Enough to sell the home, pay off the mortgage, pay the real estate commission and buy their dream home. Those were the good old days.
FACE THE FACTS! That same home, purchased in 2006 might have cost an inflated $500,000. Yet, in 2012, it may hae a depressed loss in market value and negative equity of $150,000. THAT home owner cannot sell and can't become a MOVE-UP HOME BUYER.
REAL ESTATE AGENTS' INCOME IS DOWN, DOWN, DOWN. Of the many causes for loss of income for real estate practitioners, I believe the loss of the MOVE-UP market is the most severe. That market once counted for about 25% of our income, either through local move up buyers or relocating buyers. Sure, we have relocating buyers now, but if they can't sell their existing home, they are often forced to rent when they relocate here. That's one reason the rental market is to hot, hot, hot. YES, the income for real estate agents in, IMO, in direct proportion to the loss of market value . . . . and the loss of . . .
THE MOVE-UP MARKET!
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, serving home buyers in Maryland and Northern VA.
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