Housing on the Mend --- Full Recovery Is Years Off
Last month I reported that a bottom was established in Venice in January 2012; that we are now experiencing the first signs of price appreciation; that sold home prices are at third quarter 2002 pricing levels; and, that the supply of homes for sale is at their lowest level in over ten years. In some places national media has reported double digit price increases. However, it would be a mistake to construe that we’re in the midst of a full blown recovery. A full blown recovery, coupled with consistent and significant price increases --- that is a long way off. We reached a bottom, we are on the mend, but we are a long way off from a full recovery. Rising prices have less to do with pent-up buyer demand, and more to do with the low number of houses available for sale. There were 622 homes for sale at the end of August. That’s 28% less than the 867 homes for sale a year ago. Here is why the number of homes for sale keeps declining: Since 2007 large price declines has meant fewer sellers are able to become buyers. Many would be sellers continue to either owe more than what their home is worth, or they won’t realize enough money from a sale to make a large enough down payment on a new home. So, many families looking to trade up and retirees looking to downsize are being left out. Further, banks have slowed up on foreclosures. Investors have purchased heavily discounted properties, particularly distressed properties (short sales and bank owned) and rather than resell, more have been converted to rentals. Also, few new homes have been built, as home builders have found it difficult to compete with existing discounted home prices. The point is that low inventory is not necessarily a sign of strength. Inventory is low because there are more buyers who want to buy at the bottom of the market, but, there are fewer sellers who want or are able to sell. So, why are prices rising? It’s because more buyers are chasing fewer homes. But, where are they rising? The chase is primarily concentrated at the lower end of the market, where distressed sales (short sales and bank owned) have been strongest, inventory declines the greatest and where inventory is now really drying up. In August only 83 distressed properties were for sale in Venice, of which more than half, 44 sold. That is a whopping 53% absorption rate. When inventory gets this low, buyers claw for properties to buy, and prices have nowhere to go but up. So, in August the median sold price of distressed properties in Venice rose 29.4% to $110,000, (from $85,000 in August 2011), when 33 sold out of the 136 for sale. However, since distressed properties made up only 13.3% of all homes for sale in Venice in August, its impact on the over-all Venice market, unlike other areas, is not controlling. Taking distressed properties out of the equation, the median sold price of all other properties, i.e., non-distressed properties, increased only 1.9%; $156,000 in August 2011 to $159,000 in August 2012. There were 539 non-distressed homes for sale in Venice of which 98 sold --- an absorption rate of 18.1%. This represents a 5.5 month inventory, close to a 6 month inventory which is considered a balanced market between sellers and buyers. So, taking the long-view of the overall non-distressed market, prices are not rapidly escalating. Rather, prices are appreciating in line with the historical rate of 2-3% annual appreciation.
The irony is that prices are rising faster in markets where more sellers are underwater ---- and that’s not Venice. Low inventories have established a bottom and will lead to a decline in sales volume. Further, job growth and wages are weak and are unlikely to support large price increases. Mortgage rates which remain at generational lows are boosting sales, but once they begin to rise, they will affect housing demand. For all of these reasons it is a great time to sell or buy. For Sellers who are anticipating double-digit percentage price increases or are waiting on the sidelines for prices to turn dramatically upwards before they list, they will have to wait. Notwithstanding national and regional reports of double digit increases, that has not and will not be the experience of the over-all Venice market. Rather, all indicators point to a conservative 2-3% increase for the general Venice real estate market. Therefore, a bottom, although established will not create a full blown recovery. Venice is experiencing the initial stages of a modest recovery … it is on the mend --- but, it will be a long time before prices approach anything near what we experienced this past decade.
