Boom, Bust, Boom?
I found this article by Lawrence Yum, chief economist of the National Association of Realtors, thought-provoking. I have wondered for some time how the lack of housing starts will affect the housing market in the future. It appears that a vacuum is being created and the boom and bust is heading for boom, bust, boom. Mr. Yum states that “home builders must add 1.6 to 1.7 million housing units each year to accommodate typical US population increases and replace demolished homes.” Is there any reason to believe that the need for 1.6 to 1.7 million housing starts is no longer accurate? How is it that there are “700,000 empty units above normal levels” if the cumulative deficit is 730,000?
I think some of the reason is the effect of this recession on household creation. As people lose their jobs, some are forced to move in with relatives. As high school or college graduates don’t find jobs, they don’t move out of their parents’ home. Who wants/ needs a second home when it’s value keeps dropping and it’s tough enough to keep the payments current on the primary residence? But all this is temporary and will even out over time. Unless there is a long-term reason why the need for 1.6 million housing units per year is no longer valid, simple supply and demand is going to increase home values. Keep in mind that many builders cannot build and make a profit at current valuations. In order to increase housing production, prices must go higher.
Please find link to this article for more information:
http://www.realtor.org/rmonews_and_commentary/Economy/1006_economy_housingshortage
Sales Improving
Sales volume is up significantly for the first 4 months of 2010 compared to the same period last year. In 2009, there were 11 sales in the first four months. In 2010, the first four months produced 26 sales.
Considering the amount of current activity (I.E.: showings, offers), it appears this trend will continue. Perhaps the number of new sales will become more than the number of new distressed sales. Then, over time, sales prices will start to move higher. If activity remains strong, higher sales prices are coming soon. I have not been this optimistic in a long time.
2009 real estate activity on Folly Beach
2009 has been a tough year. The first half of the year, there were only 22 sales. The second half was an improvement with 44 sales. However, sales prices continued to be under pressure. One of the last sales of the year is indicative of the real estate environment in 2009. 519 West Ashley is an oceanfront lot with a house that needs a good bulldozer. In 2005/2006, this property would have sold for more than $1,600,000.00. At the beginning of 2009, it should have fetched between $900,000.00 and $1,000,000.00. It sold in December of 2009 for $775,000.00. Click on the link at the top to see sales comparison between 2008 and 2009 on Folly Beach.
Comparison: First Half of 2008 Vs. First Half of 2009 Sales Volume
In 2008, I thought it couldn’t get much worse. Well, half way through 2009, it is obvious that this year is a lot worse. In the first half of this year, the selling price of the average residential sale (excluding partial sales and slips) was $479,909.00 compared to $597,035.00 for the same time period last year. This translates to a 19% drop in average sales prices. Furthermore, there were 2 slips, 9 partial ownerships, 4 vacant lots and 36 residences that sold in the first half of 2008. In comparison, 1 slip, 0 partial ownerships, 2 vacant lots, and 20 residences sold in the first half of this year. Excluding partial sales and slips, sales volume declined by 45% from 40 sales in the first half of 2008 to 22 sales in the first half of 2009.
Despite an almost 20% drop in average sales price, the volume declined 45%. The general consensus is that prices will continue to drop until sales volume improves. Recently, there are some encouraging signs in some communities. After significant price reductions, listings in these communities are selling. Interestingly enough, once one or two listings in a community sell, more buyers are attracted to the community.
July 14th-
It’s been a long while since I last wrote. There are several reasons why, but one main reason is that I was discouraged by the lack of activity in the Folly Beach market. I will write an activity report summarizing the first half of the year int he next few days. Another reason is that I have been very busy transforming a couple of my properties for a vacation rental program. One of the properties sat vacant when the real estate market was hot. Now, in an effort to reign in my monthly outflow of cash, the property has been remodeled and furnished to produce income.
There are more people looking at real estate than there were 6 months ago. However, there is no urgency to purchase. Some fear that things may take another turn for the worse and others don’t see it getting better in the short term. Even if prices are close to the bottom, there is no urgency to purchase until prices start firming up.
Most sales so far this year have occurred when the price of the property was significantly less than comparable properties and/or the buyer found the perfect (unique) property for their needs and desires.
For the most part, investors are on the side lines and the few buyers out there are buying for personal use. Ironically, it’s that kind of environment that can create excellent investment opportunities. This brings to mind a phrase that I have heard all too often lately: If only I had money….
Housing Affordability, Home Prices, and the Bottom
Housing affordability is very high but contrary to the past, it does not translate into higher sales volume or prices. Historically, housing prices had downward pressure when the housing affordability index was low and vice versa, housing prices had upward pressure when the affordability index was high. These days, the affordability index is above 140 which is close to an all time high (see chart). This would indicate that housing prices experience upward pressure, not downward. Judging from the Charleston/ Folly Beach market and looking at recent price declines in other markets, the fact is that prices are expected to decline further in the short term. The reason for that, I believe, is the lack of available credit and the recession. Let’s try that again. The reason for that, I know, is fear. There is fear of further price declines, fear of a worsening recession, fear of job loss, and fear of the unknown. Buyers want to be certain that the worst is over before investing any money – be it real estate or stocks.
There is no lack of buyers, but there is a lack of ready, willing and able buyers. Without the confidence that things will improve soon, the buyers are on the sidelines. The silver lining is that penned up demand is being created. While new home construction (both single family and apartments) are at a pace of 433,000 units per year and new home and existing home sales are at historic lows, America’s population is growing by 3,000,000 yearly which translates into 1,200,000 households being created yearly. I am not an economist but something is going to have to give sooner or later.
Looking at recent closings, pricing has reverted back to 2004. Taking out the up in 2005 and down in 2007 and 2008, that’s five years of no appreciation. Coupled with the penned up demand discussed above, I believe that a vacuum is being created. In the meantime, everybody is wondering when the economy will come out of this recession. The general consensus is that it will not happen until the financial system is working and banks are healthy again. By then, the bottom in the housing market already occurred. There is no way to know the actual bottom until it’s passed. And by then, prices have jumped. Therefore, if you are a buyer, make sure you have a long term plan. Real estate was never meant to be traded (or flipped) like stocks. However, there is no doubt in my mind that this year’s buyers are going to gain handsomely from their real estate purchase in more ways than one.
Home Prices: Is now the time to buy?
Many buyers’ perception is that sales prices are still too high. They search the Internet and wonder why the list prices are not dropping more significantly. In fact, list prices are dropping on Folly Beach but not as significantly as the sold prices. Here are some examples:
Oceanfront: 409 West Ashley was purchased on 7/25/05 for $1,495,000.00 and sold on 8/29/08 for $975,000.00
Mariner’s Cay: A 2 bed, 2 ½ bath condo (completely remodeled) sold for as much as $465,000.00 in May of 2006. In November of 2008 a comparable condo sold for $274,500.00.
Second row: 906 West Ashley was purchased on 6/7/06 for $880,000.00 and sold on 7/3/08 for $650,000.00.
These price drops are felt throughout the Charleston area. Below is an excerpt of a recent Post & Courier article:
Charleston-area homes are beginning to sell at prices that hearken back to more familiar, affordable levels that the region saw before the national housing boom sent prices skyward. Homes sold in January fetched a median price of $176,750.00 …., the median sales price usually measured higher than $200,000.00.
January’s median price is a steep drop even compared with homes sold in December, which had a median price of $191,000. And the last time monthly home prices were in the mid-$170,000 range was during 2004.
The 2004 pricing holds true for Folly Beach as well. This shows how fast prices were going up in 2005 (and down in 2007 and 2008). Of course, I talked to a lot of “buyers” in 2005 who wish they would have bought in 2004. Well, here is your second chance. Considering the de facto lack of or negative rate of appreciation in the last 5 years, I cannot help but think that the market is overcorrecting itself. It makes me wonder if we will revisit the steep appreciation of 2005. Clearly, the recession will have to end and financial markets will have to heal before any such rally in housing prices.
If you are a buyer, don’t wait too long because sellers won’t sell cheap when things start to look better. If you are a seller, don’t sell if you can hold on for the long run.
2008 Sales Volume Analysis & 2007 Comparison
Sales volume dropped 23% from 107 sales in 2007 to 82 sales in 2008. The decrease in sales volume was experienced in residences over $500,000.00. Despite the drop in sales volume in general, sales of properties for less than $500,000.00 actually increased in volume. I believe the two main reasons for this phenomenon is the buyer’s aversion to risk and the much higher mortgage rates for jumbo loans. Due to economic conditions in 2008 that persist now, buyers are hesitant to purchase. Those buyers who decided to go ahead with a purchase are feeling safer in buying lower priced properties. The decision to buy a property in the lower price spectrum of the market is reinforced by the significant jump in mortgage rates for loans over $417,000.00 . While loans below $417,000.00 are considered conforming loans, loans over $417,000.00 are considered jumbo loans that can carry a mortgage rate of 2% higher than a conforming loan. Assuming that a buyer has a down payment of 20% of the sales price, a $500,000.00 purchase would enable the buyer to get a conforming loan at a historic low mortgage rate.
Sales Volume Analysis of 2008
Using the information available through the “Multiple Listing Service”, there were 82 sales (closings) on Folly Beach. These 82 sales were comprised as follows: 5 vacant lots, 4 boat slips, 12 partial interest ownerships, and 61 residential sales. Taking a closer look at the residential sales, 33 were $500,000.00 or less, 20 were between $500,00.00 and $1,000,000.00 and 8 were over 1 million.
Comparison to 2007
While sales of vacant lots (7), partial interest ownership (12 sales), and boat slips (5 sales) were very similar, residential sales in 2007 were significantly higher (83 sales). It is interesting to point out that sales of properties for less than $500,00.00 actually increased from 26 sales in 2007 to 33 sales in 2008. In contrast, sales between $500,00.00 and $1,000,000.00 were 45 in 2007 compared to 20 in 2008 and sales over $1,000,000.00 were 12 in 2007 and 8 in 2008.
Paradise in December
The weather is phenomenal. Sunny and 70 degress with a light breeze. I spent today with my 3 1/2 year old son, Max. I had one of those memorable afternoons at Middleton Place. We practically had the place to ourselves and took many breaks to look at the different flora and fauna. The sun shining through the Spanish moss hanging from the Live Oaks, the turtle resting on a log in the pond, and the blue heron gliding to a graceful landing, were just a few of the things we saw that make the lowcountry a paradise. While other parts of the country were dealing with snowstorms, icestorms and 0 degree weather, I had the best time with my son.
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- Max at Middleton Place
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- Middleton Place
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- Live Oaks Dripping with Moss
2008 Folly Beach Christmas Parade
Folly had it’s annual Christmas Parade. As in years past, the turn out was terrific and everyone had a blast. Since I live near Center Street, I was able to run home and grab my 3 year old son, Max, and enjoy the show without having to get in the car. Not only is it fun to watch the parade, it’s also a great opportunity to catch up with fellow inhabitants of out great little island.
