SPECIAL REPORT -- July 31, 2006
Statistics Reflect A Changing Market
Windham County sales figures as reported in the Vermont Real Estate Information Network (VREIN) Multiple Listing Service (MLS) show that double-digit annual appreciation in the value of single family residences has ended, and the ratio between listings taken an listings sold indicates underlying, market weakness.
The current market is unsettled. There has been talk of a real estate bubble, and home prices in other parts of the country have been dropping. The number of listings sold as a ratio of listings taken (the "batting average") for the first half of 2006 has dropped significantly in Windham County, as well as in Brattleboro.
A HISTORY LESSON:
A decreased "batting average, has been a very reliable (but often overlooked) sign of a weakening market. For example, in the late 1980s price were rising dramatically, and, with each year seeing a larger number of properties sold than the previous year, our local real estate market was "hot." Like the first half of the current decade, prices were rising phenomenally. At year-end in 1985, MLS figures showed the average sale price of a 3 bedroom, single family home was $65,583. In a short four years, at the end of 1989 the average sale price for the same type of home had risen to $124,944: Nearly double!
Anyone watching the show would have thought that 1989 was a banner year. Now with perfect hindsight, I can tell you that the batting average during those four years had slipped from 47% to an anemic 28%. How is this possible? MLS reports that in 1985, a total of 1,071 properties (of all categories) were listed, and 503 sold. In 1989 a total of 2,156 properties were listed, and 595 sold. So, while the slugger hit more home runs and the fans cheered; he had gotten up at bat twice as many times and struck out a whole lot. Just looking at the increased sales volume and price appreciation, the underlying market weakness was not apparent. But in 1990, the market crashed.
CURRENT MARKET CONDITIONS:
The "batting average" for the first half of the year is normally lower than it will end up being for the entire year since more listings are taken in the beginning of the year, but more are sold toward the end of the year. Nonetheless, the amount by which the "batting average" is down, both in Brattleboro and in Windham County, is significantly greater than could be accounted for by the first-half-of-the-year effect. [tables showing the actual figures will appear on my website before the end of the week.]
Obviously, rising interest rates have a depressing impact on appreciation. Most buyers decide how much they can afford, not by the actual price of the home, but based on the monthly costs. As interest rates rise, each dollar in monthly housing costs supports less of a loan value.
At the beginning of this year's selling season, a stand-off seemed to be developing, with many buyers taking a "wait-and-see" attitude, and sellers who had missed the peak, still holding firm, unwilling to relent on their hoped-for price.
But the market is ruthless, and, sooner or later, it forces everyone to revise their viewpoint about what is realistic. Sellers who need to move on cannot sit on their property forever. Buyers do not want to stay where they are while the opportunity to own a home recedes like a forgotten dream. As a result, we are now seeing more tugs-of-war over price than we have during the past several years, and both sides are compromising.
THE FUTURE:
Unfortunately, when I bought the computer program which unerringly predicts the future, I threw away my crystal ball, and now the computer program has developed a bug and no longer works.
Seriously, although current prices are affected by people's expectations about future prices; a year from now, anyone who predicted correctly will be sure to brag about it, and those who were wrong, will be careful not to mention it.
In comparing the current situation with the late 1980s, inevitably the question arises as to whether history will repeat itself. Obviously, there are similarities; but there are also differences. For whatever its meaning, one huge difference, is that the the average price of a 3 bedroom, single family residence in Southeastern Vermont rose from $94,000 (rounded off) in 1988 to $124,944 in 1989. That is a precipitous rise of 22% during the year immediately preceding the crash. But in our current market, the double-digit appreciation of the past few years has gradually tapered off, which could be seen as a market adjustment in lieu of a crash. Am I just a Realtor deluding himself out of wishful thinking? Hmmm, where did I put that eight-ball I got at Experienced Goods!
The bubble theory is based on several factors. A major argument is that the ratio of home prices to average income has become unsustainable. Another factor is that the proportion of real estate owned as investments and as second homes, rather than as primary homes, is at a record high point. An investor who finds a better vehicle in which to put his or her money, will sell. If enough of them do, especially if they do suddenly, it will have the effect of saturating the market with inventory. Same with second homes: In an economic downturn, the first thing to go is a second home, because it is not a necessity. To a degree, the second home market is separate from the primary home market, but not entirely: There are many second homes which would also be suitable as primary homes.
The counter-theory to the bubble-theory is that the strength of our local real estate market is driven by population pressure, and uneven supply and demand. There are only so many homes in Vermont, even when you include new construction. Yet we have seen an increasing number of relocations, especially since 9/11/01. Vermont is a desired destination. Those of us who arrived 10, 20, or 30 years ago may want to say: "Last one in, shut the door!" Nonetheless, people keep coming. There is a huge disparity in the scale of real estate values between many of the places people are coming from, and here. Someone who has just sold a modest home near Washington D.C. for $700,000 may find that a nicer home on acreage for $350,000 is a bargain. The reasoning behind the anti-bubble argument is that, because there is so much cash coming in, and so many people are now becoming able to move here-- either because they can retire, or because of portable, internet incomes -- that continuing demand will not allow the bottom to drop out of the market.
As always, the buyer wonders whether waiting will result in an opportunity to snatch a bargain; or if it will turn out that s/he who hesitates gets left behind.
AFFORDABLE HOUSING PROBLEM IS SYSTEMIC (warning -- editorial)
Increasingly over the past several years, even though the number of new housing units created were almost twice the number of new units needed for primary housing, there was still a shortage of primary housing, particularly affordable housing. This is because a huge proportion of new units are created to be sold as vacation homes. In other words: Our society has more than sufficient resources to provide decent housing for every American, but, for whatever reason, luxury has been given a high priority over necessity. As a result, folks who qualify for the special, affordable housing programs, often find that they have an eligibility certificate, but they have been priced out of the market. A market adjustment will definitely hurt some people, including older people whose retirement plans depend on anticipated appreciation on their homes. But it may also help others.
Steven K-Brooks, Principal Broker
Brattleboro Buyer Brokerage Real Estate