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  Unless there is a long-term reason why the need for 1.6 million housing units per year is no longer valid, simple supply and demand is going to increase home values.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

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 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.

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 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.

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.

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.

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.