Roth on Real Estate

Where the Real Estate Market is Already Bouncing Back


Want to know what is going to happen in the real estate market in the months and years ahead?

Look west.

One of the things I have noticed, after more than two decades in the real estate industry, is that all the trends—from how big a mortgage people are willing to take out, to the concern about energy-efficient homes, to whether we are going to enter a hot market or a cold one—begin on the West coast and then move toward the South, the Midwest, and then finally to the Northeast.

And those trends, at least as I read them, indicate that residential real estate has already begun to recover.

Really.

According to the National Association of Realtors, annual transaction counts—the number of all homes bought and sold—peaked in 2005. The number dropped significantly (by 17%, to be exact) in the West in 2006 but at only a modest rate—around 6%—in the other three regions.

In 2007 the West continued its steep decline in transactions with a decline of about 20%, while the South, Midwest, and Northeast incurred declines of 13%, 11%, and 7%, respectively.

Persistent Patterns

Are you starting to the see the trend? The West started getting clobbered in 2006 and continued its decline through 2007. The South followed closely by starting its decline later in 2006 and into steep decline by 2007. The Midwest didn't start its decline until the second half of 2007, and the Northeast went relatively unscathed during 2007.

The regional transaction counts got more interesting in 2008, the year the federal government declared that we were already a year into a recession. While the other areas were in free fall, declining nearly 15% to 16%, the West was down only roughly 1%.

The slowing of negative numbers is encouraging, but those numbers are still going in the wrong direction. So where's the good news I promised?

Right here: As of today, in the middle of 2009, the West's transaction count is up almost 7%, while the other areas' declines have decelerated, now down only 3.5% to 7%. The average existing home sale prices seem to be following a similar trend line, albeit a bit behind the transaction counts. (The only aberration is, ironically, in the West—more on this later.)

Hopeful Signs

So, what does all this tell us?

The transaction numbers show that the West was the first to decline, the first to stabilize, and the first to begin climbing out of the real estate mess. Since industry trends historically move from the West to the Northeast, it's comforting to see a deceleration of transaction count declines everywhere else, much like the West experienced in 2008. (And counts' rise in the West is the most encouraging news of all.)

The increase in transaction counts, coupled with the decrease in inventory—the number of existing homes for sale peaked in November of 2008 at an 11 months' supply; it is now somewhere around nine months—leads to hope that we are beginning to inch toward a recovery.

But what about housing prices? Sales prices in the West starting dropping precipitously in the latter part of 2007 and began falling in all other regions shortly thereafter. Prices in the West fell an additional 19% in 2008, and from 4.5% to 6.7% in other areas. Thus, the trend continued both in timing and relative severity.

An Aberration Out West

But here's where we see a bit of a divergence in the trend, which I believe has a rational explanation. This year, while the other areas seem to have hit bottom in January and February—and have actually bounced up a bit, around 7% in the Northeast, 10% in the South, and 12% in the Midwest—the West is near a low, down an additional 27%. I think the West's delay in price recovery is an aberration caused by two interrelated factors. First, home prices in the West went up the most, so obviously they have the greatest distance to fall. Second, while high foreclosure rates are occurring everywhere—the South has Florida, and the Midwest has Michigan—the West is home to substantially more foreclosures. The Mortgage Bankers Assn. provided data revealing that Nevada, Arizona, and California accounted for more than one-third of all the nation's foreclosures. (And the foreclosure rate in each of those states is at least double the national average.)

Why?

While prices were going up, especially in California, a significant number of people borrowed against their equity to buy a second home or an investment property, many of which were in the region (Palm Desert, Phoenix, Las Vegas, etc.). When prices dropped they were hit doubly hard, in some cases losing both properties.

But even here I see good news. The West's increase in transaction counts, coupled with a decline in inventory, is further evidence that a major purge has occurred, making way for inevitable price recovery. The South, Midwest, and Northeast experienced their increase in foreclosures and have still come out with stable and rising home sale values. There is no reason to think the West will be any different.

Some may say I'm looking through rose-colored glasses. Maybe so. But I am putting my money where my opinions rest: Unlike others in my industry, I believe these trends send a strong enough signal that I am adding staff to both my sales force and call center.

If you remain skeptical, I hope I have at least moved the needle on your perspective to glass half full!

Marc_roth
Marc Roth is the founder and president of Home Warranty of America, which touches just about every part of the real estate industry since it sells through builders, real estate agents, title companies, mortgage companies, and directly to consumers.

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