There’s been a burst of new activity over the last several months, with the volume of signed contracts increasing through the spring and continuing (hopefully) well into the summer. As I write this on a mid June morning, buyers have been stepping out regularly in growing numbers to evaluate the inventory pool, and stepping up steadily, however cautiously, making offers to buy and going to contract with sellers who finally have come to terms with market realities.
Lots of deals in every price and size category are being made—even in the over $10 million range which was largely stalled until very recently. There’s movement and buzz and even competitive bidding. Cash remains today’s king, as sellers settle for less money for a transaction that will close quickly with certainty. More and more, requests for appointments by brokers are met with the news of accepted offers.
The fear and inertia of last winter have abated, but we’re down from the highs of 2007 about 25-35%, more on prices for the larger apartments, and less for the smaller units. Since March, an improving stock market has served to restore and rebuild consumer confidence. In April, according to the National Association of Realtors, the number of signed contracts rose 6.7% nationally—the largest monthly jump since October 2001.
A smorgasbord of alphabet soup recovery models has been suggested. Regardless of whether you believe the economic recovery will take the shape of a curved U, a protracted L, a straight V or a W, or whether you agree real estate prices will hit bottom by the end of this year, and the cycle will begin to improve in 2010, we continue to operate in an exceptionally strong buyers’ market.
Buyers Maintain The Lead
First time purchasers especially who were priced out of the market before are attracted by steep discounts, low interest rates and the $8,000 Obama tax credit. The federal inducement is for anyone who hasn’t owned a home in the past three years whose income is below a specified level who will live in the residence for a minimum of three years. Slated to expire on December 1st of this year, the tax incentive will continue to stimulate small apartment sales through the summer and early fall. Efforts are underway in the Senate to extend this perk to all home buyers and to raise the credit to $15,000.
Today’s buyers are also coming off the sidelines not only because they need to move on with their lives, but because they don’t want to miss the moment of opportunity. Rising interest rates in the face of inflation have pulled in many fence sitters for fear they will miss the window to secure a low rate. More often than not, those who try to time the market fail; if they wait too long, the chance to gain the advantage passes. Bottom fishers are unlikely to conclude a deal, because they remain cemented in place with their low ball offers. For those with a time horizon of at least five years, the most opportune time to join ranks is when the stock market is improving, but before the overall economy has caught up.
Those sellers who are also buyers in this market—regardless of whether they are trading up or down—will make up any perceived loss on a sale with savings from a reduced future purchase. In a down market, buying up costs less than in a rising market because fewer dollars are required for the percentage difference. Today’s sellers are advised to price realistically, pay attention to value and respond to all bidders. Even low ball offers warrant a counter to signal a desire to close the gap. Those who bought after 2005 should expect to lose money or break even at best. If prices were to go up now, buyers would retreat again.
Uncertainty still clouds the big economic picture. A new wave of defaults and foreclosures is spreading beyond risky subprime borrowers to previously stable borrowers who find themselves jobless. Probably the biggest impediment to a full recovery is unemployment which hit 8.9% in April and 9.4% in May, and is expected to reach 10% by next year.
Despite the contracting economy which continues to struggle with mounting layoffs and ever-dysfunctional credit markets, economists are predicting that the recession will end in either the 4th quarter of this year or the 1st quarter of 2010. As the recession nears an end and sales activity increases, price stability will follow. The big picture needs to improve significantly before our market regains a bounce.
In the meantime, savvy buyers are out shopping with their brokers in increasing numbers, taking advantage of substantial discounts, not worrying about near-term paper losses or gains, and reaping the benefits of living in their brick and mortar investments.