If you have owned a home, condo, or vacation home in the last five years, you know that prices went up. This went on for more than a year, but it ended more than a year ago. When it comes to investing, having a home for 50 years has been a great way to get rich. It's one of the few ways to invest where you could live in your investment while its value went up. Most investors don't know that from the end of World War II until last year, home prices never went down on a national level until last year.
Homeowners have counted on a steady annual increase in the price of the house they lived in to create a wealth effect. For many people, it was the only way they had to save money. It was also a part of the American dream, which is to own and live in your own home.
There are now studies that show a number of housing markets went down at the end of last year. In fact, the drop happened in 149 different markets. East and West Coast cities and cities in the Northeast were hit the hardest.
If you went to Florida at all last year, you couldn't have missed the thousands of super cranes building 20- to 50-story condos. Most of these condos were bought on a whim, with the buyer signing the contract without ever thinking that they would have to close on the deal.
So far, we haven't seen a lot of walkways. These are the people who signed non-recourse agreements with the builder and can get out of the deal without having to pay anything. But they will lose the money they put down as a deposit.
Florida may be the state where real estate is getting hit the most. By the end of the year, Sarasota was down 18 percent and Melbourne was down 17 percent. We are talking about prices going down in real life. Prices fell by 2.7% across the whole country.
Many analysts still don't understand what this means. Are motivated sellers keeping their homes for longer because they think they can get a higher price later? Some sellers may be taking their homes off the market or not putting them on the market at all because they want to wait for prices to rise, maybe later this year.
How about sales in general?
Not only are prices going down, but there are also fewer sales, which means there are more homes that aren't being sold. Forty different states have said that the number of sales has gone down. No matter how much a home costs, the actual number of homes sold has gone down by 10.1% on a national level. Three different places have said that physical sales have dropped by more than 30%. Nevada, Florida, and the District of Columbia are among them. Virginia reported a 20 percent decline.
Six of the fifty states said that the number of sales went up, so that's six out of fifty. Alaska, Arkansas, Illinois, Kentucky, Mississippi, and Texas were among them. There was no effect on sales in Utah, where they stayed the same.
You should really look at the VACANCY rate. The vacancy rate is the number of homes that are for sale but have no one living in them. This number always seems to be around 2 percent on a national level. At the end of the year, the number went up to 2.7%. This is a huge increase because 2.7 percent is the highest it has been in 50 years, and that's only because they started keeping track of the number 50 years ago.
There are some owners who are just waiting and won't sell for less than what they want. This is why the number of empty homes has gone up. Plus, you have another problem. There may come a time when a seller has no choice but to sell. He will take what he can get, even if it sets a new lower base from which everything else can trade.
Once this base is set, other buyers and sellers will be able to see it. The seller gets worried. The buyer is happy, but also scared because he or she doesn't know if prices will go down even more. This is how selling becomes a panic, and there are no buyers. The buyers leave, hoping that prices will go down even more.
It's the same as the stock market: sellers don't want to sell at a lower price after seeing prices go up. Many people would rather wait and hope that the price will go back up. The deal will only go through if the seller has to. It could be because of an estate, a divorce settlement, or a move that forces the sale. No matter what, the real estate market will change once that sale is out there for everyone to see.
Which way is the BIAS going now?
It's hard to say if the year-end numbers have gotten rid of the long-term excesses that have happened in the real estate markets over the last five years, when everything went crazy in the right direction. There could be more. If you look at the stock market, you can see that most of the house builders hit rock bottom a few months ago when they all made new lows for more than a decade. Since then, they've done very well. If the real estate market keeps falling, these stocks will probably need to make a double-bottom before the decline is over.
If, on the other hand, the vacancy rate goes down from here on out and prices stop falling, then most of the damage has been done. The economy as a whole and the interest rate seem fine, so we don't think a drop in GDP will hurt anything this year. What seems to be happening is that the excesses that have been made in residential real estate in this country since the late 1990s are being worn down.
The places in the country where real estate prices went up the most are now the places where prices are going down. It's always the same story. The only thing that changes is which parts of the country are affected. Our research shows that prices and vacancy rates still have a long way to fall. At the same time, we think that the housing stocks may go down, but that the bottoms that were set months ago will hold. We are already out of there.
Goodbye and best wishes
Richard Stoyek
