The Sales Data Looks Healthy

by Rod Sager (Posted today on his Blog as well)

I just spent the better part of this morning analyzing recent data from our local Multiple Listing Service and decided to run my 13 month analysis. One thing we often get in real estate is snippets of data year over year. This can be a good quick check to see which way the market has moved over a year, but lacks the insight provided by a monthly look at the trend over that whole period.

Many people like to see great leaps in price or sales but that can be unhealthy. Of course it is not as unhealthy as a depreciating market or precipitous drop in sales. But a rapid rise can lead to a premature peak and result in an uncomfortable drop in the market. Think about the four years of 2004 to 2007.

Data acquired from Regional Multiple Listing Service for Clark County, WA 
9-2012 through 9-2013 single family homes, excluding condos

Generally a modest and smooth appreciation in home values along with solid relatively flat seasonally adjusted sales is very healthy. Guess what? That is exactly what we have right now. The 50 year average appreciation for homes runs right around six and a half percent per year with a little more in up markets to offset the down markets. So an 8-10% annual appreciation over a decade is pretty healthy.

The median price for Clark County, WA is up from 197k in September 2012 to 237k as of September 2013. That represents a non-seasonally adjusted jump of around 20% but the curve will flatten again as we approach the winter. That sharp increase is a much driven by a movement from entry level buyers to mid level buyers as it is about actual appreciation. What I mean is that the inventory for the 125k-150k move in ready home dried up. Most of those entry level buyers are still making the same income they made a few years ago and they are priced out of the market. However those who sold their entry level homes a year ago made the move up in the last year driving the move up market. That moved the median price up disproportionately to actual appreciation.

I believe we will see a 30 month growth in median price starting from June of last year and ending on January 2015 at close to 30% which will average to around 10% annually. This is would be healthy. The current flat economy will keep things well regulated and without some improvement could lead to a fade in this valuation bump we had recently. The first spurt of growth is also often bigger as fence sitters jump into the market. If the market growth slows to a more modest 8-10% that is not a bad sign. On the contrary, it could lead to a steady long term rise in prices that is sustainable over a decade or more.

All that said, the real estate market is affected by many variables in the economy. Interest rates are a strong driver of real estate sales and they have been in the basement for several years. They could be on the rise as the federal government backs off their support of mortgage securities.  Even if rates continue their upward march toward normalcy, the market can still enjoy some growth. The fed will most likely continue their support of rate suppression until the economy is on solid footing. A growing and healthy economy will produce more qualified home buyers. We will lose some entry level buyers to higher rates but gain some in economic upward mobility as things shape up on the job front.

Inventory remains tight but there could be a pent up supply waiting to come on the market. Many people have been sitting on those homes they bought in the boom of '04-'08. They bought at or near the top of the market and have been unable to sell since the crash because they owe more than the market will pay. That is beginning to change as the prices move upward. Many of those people will soon be in a position to sell and many may exercise that option to take advantage of these still relatively low interest rates. Furthermore it has been reported that many banks are strategically holding on to REO inventory which adds to that potential inventory increase over the next few years. An increase in inventory will flatten out the sharp appreciation, but the availability of willing buyers should keep things modestly improving. Overall the real estate market is in position to enjoy a sustained gentle growth pattern that is healthy and beneficial to a recovering economy.