“How’s the Market?” September 30, 2014
The highly-publicized Case-Shiller/S&P Home Price Index was released today. The methodology for this nationwide broad-based swipe has been changed recently from an analysis of 20 Metro areas to an attempt to draw data and make conclusions on the entire nationwide real estate price trends.
Never has the opinion of Zillow CEO Spencer Rascoff been more accurate: these broad based search engines and “analysis” of price movements are valuable only to a point. When you need real answers in specific cities, towns, and neighborhoods, seek out the best local Realtor you can find to discuss THAT market.
Here is my take on this index and the overall market in fall, 2014. To the extent that national trends mirror local trends, or visa versa, I will attempt to clarify:
- Prices are decelerating and may actually be declining in some areas. I realize that this is not what you are hearing from other sources, particularly those in my industry who have a vested interest in always claiming that prices are rising. Keep this in mind: when I projected far greater price increases than any other known source in 2010, 2011, and 2012 (and I actually undershot the magnitude of the price gains), I was accused by many of being a polyanna. I try to be a realist.
- The main reason I can identify as a driver to decelerating prices is one which I predicted early this year: prices were driven much higher than anticipated in recent years by a chronic shortage in listings, creating a supply/demand imbalance. “Bidding wars” and the like became normal again, not because of a flood of new buyers, but simply because there was an extreme limited supply for those who needed to enter the market. In most neighborhoods, sellers/Realtors were slow to spot this trend and so they underpriced listings, generating quick sales and many sales over list price. This is no longer the case in any Northern Virginia market I cover. As more sellers try to take advantage of recent price gains, the urge to reach for higher prices, a strategy which was appropriate in 2013, is inappropriate now.
- The number of “investor buyers” is in decline from the frenetic and historically high levels of 2009-2010. The flood of new money for major projects from hedge funds, REITS, and other major consortiums is not anywhere near where it was. This is to be expected as prices have risen and inventory of homes financed and purchased by these investors is bulging. A major threat to future prices could come from the “unwinding” of these huge trades made by Wall Street-type investors. A gain is not a gain until one sells, and who will be the huge “take-out” buyers for the millions of units controlled by this investor group?
- Despite record low interest rates, affordability indices are down. This is a key long-term component of value, and one which has been consistent over time in predicting future price movements. Interest rates hit ludicrously low levels in 2013 and remain low in 2014. Eventually, this will change, although predicting when and how is a game I long ago learned is fruitless to play. However, if rates rise, affordability drops, unless prices drop in tandem. Beware.
- I have discussed the potential for a rental housing glut in many areas of Northern Virginia for quite some time. This reality has hit home in the Reston Town Center, and is likely to be exacerbated in the next few years. Back to the point made about outside investor money constructing “luxury” apartments to take advantage of lower interest rates and depressed prices. In new construction, these commitments are executed over a long time frame, and market conditions from the time of initial investment to actual sale/occupancy can shift dramatically. Yet the buildings need to be finished and more supply is added. A look back in the Reston Town Center shows how timing is everything: The Savoy/Market Street Condos and The Paramount reached the point of sale and occupancy at virtually the top of the market in 2005-2006. Long waiting lists of buyers feeling lucky to get in were the norm. Builder profits surged as the buildings sold out instantaneously at premium prices. Yet the Kettler Brothers construction of “more exclusive” buildings at MidTown North and MidTown Towers were not ready for occupancy until a year+ later. Much can happen in a year. The ensuing collapse in demand for this type of housing created a long period of time in which the developer had unsold units, high expenses, and eventually had to sharply discount prices to make the MidTown Reston buildings fully occupied. There have been, and will continue to be, construction and completion of major new “luxury” apartments in the Reston Town Center. Combined with the need of many owners in existing buildings to rent their units in a one-off transaction, supply of rental units is already bulging and will become moreso. This does not yet seem to be taken into account in rental pricing, as existing listings on one-off units sit idly on the MLS by owners unwilling to rent lower, and with both new and existing larger-scale rental buildings discounting move-in rents but keeping publicly-stated rents high. Employment growth and the urge to be in newer urban-type areas bodes well for the Reston Town Center; however, the market seems way ahead of itself in fall, 2014, as measured by rents, and by recent home sale listings. This same dynamic exists in other areas of Northern Virginia.
- One cannot underestimate the low household formation, which is a major driver in the moribund first time home buyer market. This has been a driving force in the past to builders and move-up buyers. The lack of first time home buyers has changed the builder mentality to be one which is focused on “new urban centers” and other forms of “luxury” housing. This is demand-driven and real, but the de-emphasis in building for first time home buyers and apartments for new entrants to the labor force is nowhere near what it has been in the past.
- The current mania in new construction is for the urban and the “cool”, with upscale appliances and fixtures in urban and urban-like areas. This trend shows no signs of abating. The upshot is that more people are being lured into more expensive housing, which is also inflating the “average home price” and the “average rental price”. As any CPA can tell you, beware of discussing things in terms of “average costs” and the like.
- The move away from the traditional suburban community is affecting home prices in some of the most exclusive areas in Northern Virginia. It also is affecting the upscale “trade down” market in a dramatic way. For example, much of the demand for exclusive Reston Town Center condos comes from the sale of multi-acre estates in places like Great Falls. Without a strong and active sale market for these estates, a large chunk of potential demand is taken out of the Reston market. This same dynamic is affecting, and will affect, similar markets in Arlington, Alexandria, and Tysons Corner. An example of instances in which this trend away from suburban living is creating value is in some of the exclusive golf course communities of Northern Virginia. To put it mildly, I am floored by some of the discounted prices in magnificent properties in exclusive gated neighborhoods. Much of this is a marketing issue, as those who may desire such a life style are unfamiliar with the existence and quality of these communities. But much of it is a change in demand.
- Broad-based indices of sale price trends are grossly inadequate in reflecting what is really happening in markets around the country. This has always been true, yet there always seems to be some need to rally behind the top data-gatherers and make inferences from these numbers. Call a local expert. Do not rely on aggregate numbers and Wall Street talk when it comes to real estate.
- Beware of stated price gains which are comparing apples-to-oranges. With more sales of newly-constructed units in more expensive areas with more expensive “extras”, what looks like a price gain may really be a simple adjustment to a higher quality basic home. This is not unlike automobile prices rising as a result of the many features added that we now consider “standard” which used to be options, if offered at all.
I have recently upgraded my web site, www.RayMaxInternational.com, to be extremely customer-friendly. The search engines are easy to use, and the results more accurate and timely than those you may get from generalized real estate web sites. I attempt to keep commentary crisp and honest, without much fluff. I strongly recommend and welcome you to contact me for further discussion on any related topics, particularly as they pertain to Northern Virginia real estate.
Ray Wedell, Realtor
Chartered Financial Analyst, CFA