 Market Report: March 2005
Someone Turn on the Lights by Jim Scott
The performance of the residential resale market for the first two months of this year has been lackluster when compared to seasonal patterns. The rate of monthly sales is a very important indicator in determining future price performance. Sales volume is the most accurate barometer of future changes in the market’s pricing structure. I would like to think the rain has something to do with this sluggishness; the truth is probably more in differing buyer and seller expectations.
There are many factors that drive down market velocity. It is always difficult to escape the yoke of history when trying to peer into the future. Newer determinants generally emerge that affect markets and confuse a rational analysis of the situation that is partially based on past performance.
2005 So Far
The rate of sales is about half of what would be considered normal. Eight homes in my market tracking area have gone to escrow since the first of the year. My guess is that the average price per square foot of the lucky eight was around $560—exactly on the market. What is interesting is that all but one of them were listed in January.
So why were these new listings so eagerly snapped up by buyers? The sellers of this January crop priced on the market and were successful. There is a reason the also-rans are still waiting to be asked to the dance.
Open houses are always a great way to assess the buying public. So far this year I am amazed at the sheer quantity and quality of visitors to my open houses. I still believe there remains strong effective demand for homes in spite of real and imagined economic dangers lurking in the shadows. When you discuss stocks and homes at the same time you can understand why the Dow is stagnating.
Complacency and Interest Rates
Thirty-year fixed rate conforming mortgages are around 5.6% as of this writing. The Fed has raised rates six times, since last June yet the key benchmark for mortgages, the ten-year Treasury, has fallen about one-half point. Thus real estate consumers have not really experienced any impact resulting from the end of the Federal Reserve Board’s period of accommodation. Last week Alan Greenspan, the chairman of the Fed, said that situation of abnormal long-term rates “remains a conundrum”. He further went on to warn future mortgage borrowers that this period of unusually low rates “may be a short-term aberration”. You have been warned.
This has led to a bit of cockiness in the real estate business. Eventually long rates will have to realign with short rates. Mortgages, at least the fixed rate variety, will increase substantially to match the Fed’s new posture on inflation. It seems that the ten-year treasuries will have to head north of five percent by this fall and mortgage rates will have to follow.
This reality is already built into the marketplace as consumers have already adjusted their behaviors based on more expensive future money. Money will have to cost more. Our government must go to the financial markets to borrow for both the current budget deficit and the war in Iraq. Unless there is some radical change ahead, expensive mortgage money is in the cards.
But higher rates do no necessarily mean our local market will collapse or drift into a period of benign neglect. I am not indifferent to the effects of rates; I know those who have used high degrees of leverage to purchase property will suffer if rates increase another point and one-half over the next twelve months. As long as these increases are measured, which is the bent of Mr. Greenspan, the market will adjust but not collapse. 1990 is probably not going to reoccur but 1973 may. I was in both recessions and I clearly would prefer the latter.
I am not predicting recession. While the year has started off slowly, I suspect Iraq, the rain and rich asking prices are really the main culprits. I see little panic among sellers as price cuts are judicious and deliberate. Smart sellers are willing to slowly make cuts until they find a buyer. Any property perceived as well priced will typically sell in a few days albeit not with multiple offers and the carnival of the past few years. Some sellers do it right away and others need to wait a bit before adjusting their expectations. But this is good when taking the long view. Market distortions always demand retribution. Those who sell will determine if a bubble occurs. Thus far some sellers seem sensible and are making the adjustments necessary to keep the market on a relatively even keel. That bodes well for the future. Remember the buyers still want this product.
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I welcome your comments; my email address is jimscott@sqre.com. You can reach Jim Scott at his office, conveniently located in the heart of Mission Hills, at 1111 Fort Stockton Drive. Founded in 1982, Scott & Quinn is the oldest full service real estate firm in Mission Hills and is still locally owned and operated. Jim has been a homeowner in Mission Hills since 1976. He is married and has two boys. He can be reached at 296-9511, extension 100. Scott & Quinn features professional property management as well as 15 sales associates. Click here to see Jim's past Market Reports. You can also download Jim's 26 page research paper on San Diego County apartments.
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