Thoughts for the week 3/24/11…when will the flowers Bloom?

One number that stands out in our Weekly Market Watch is the transaction trend, down 19% YTD.  During the first ten weeks of 2011 there were 78 fewer sales recorded in Downtown Boston than during the same period of 2010.  At the same time the Average and Median selling prices are up 3% & 1% respectively.  We believe there are a number of factors contributing to these trends:

• Low Inventory of properties available
• More stringent mortgage underwriting guidelines
• The economy and job security
• Lack of New Development, specifically in the under $500,000 price range

 

The Downtown Boston condominium inventory in Q4 2010 represented the lowest level of available inventory going back ten years to Q4 2000.  A decade ago sales below $500,000 represented 80% of all transactions, today that segment is down to 50%.  Since the financial crisis of 2008 mortgage guidelines have become stricter as a result of legislation such as the Dodd Frank Wall Street Reform and Consumer Protection Act.  Lending practices prevalent in the mid-2000’s like Ninja loans and drive by appraisals are no longer acceptable.  Today lending institutions require larger down payments and higher credit scores.  Taken in the context of the past ten years, these rules appear restrictive, yet are simply a return to traditional lending practices (and the norm in Downtown Boston for the most part during the U.S. bubble).  The economic recovery continues be uneven, with news of both a positive and negative nature.  While the Federal Reserve is actively stimulating the growth of the economy through QE2, it is also worried about growing too fast and allowing inflation to get too much ahead.  There is job growth in Massachusetts – 15,000 new jobs were added in February 2011 yet unemployment in the state remains above 8%.  Limited inventory, strict lending requirements, and an improving economy especially locally, should create competition with more confident & very qualified buyer profiles, which will result in upward pressure on prices.  This is a very different and contrarian situation to the U.S. and Metro markets as projected in the S&P Case Shiller Index.

 

Where S&P Case Shiller might not apply.

At the end of every month real estate agents, bloggers, journalists, sellers and buyers wait, some with baited breath, for the latest S&P Case Shiller report.  Depending upon which dog you have in the hunt, looking for evidence to support your position is part of the fun.

In full disclosure; I am a Realtor.  I have been since 1988.  In a sense this is my second ride at the Boom & Bust Rodeo. If you look back at the numbers, 1988 was leading into  the peak and then the reset of 1990/1991.  Just as I was learning how to dance in that crazy market, the music stopped and there weren’t enough seats.  Fortunately, I learned some good habits by trial and error and by watching the best brokers in my office work through the down turn in prices.  This market is true to form, moderate growth, run-up in prices, then a re-set of values to some prior level.   What I learned in back in 1990’s was to watch the numbers like a hawk.  Stay especially focused on your local numbers, your city, your neighborhood, and specific price ranges.  Remaining aware of all that data, what today we call being Hyper-Local gives you the knowledge and perspective to guide sellers and buyers through the fluctuations in the market.  In addition understanding the way the numbers are compiled helps immensely.

So here is where we get to Case Shiller, which I believe, is the gold standard for the National real estate picture.  The national Case Shiller index sometimes is not the best barometer for your local market.  Take my Boston neighborhood for example.  Between 2006 and 2009 values (based on annual median sales price) have increased by 8.5%.  They are trending even higher in 2010, but I’d rather wait till year end to peg a number.  If you were to look exclusively at Case Shiller data trends, and make you buying decision based on that information, you would make a poor choice.

Let’s say for example a homeowner in my neighborhood bought a condominium unit in 2006 for $650,000, and wants to sell that same unit today.  At what value can they expect to sell the unit, all things being equal (they have made no improvements nor have the diminished the unit in a demonstrable way).  If you go exclusively on the Case Shiller national percentage change -30% you would say the value was $455,000, if you use the Boston Metro percentage change -17% then you would say the value was $540,000.  Diving into the Hyper-Local information tells you that the median has increased, so you could use that percentage change, for a value of $705,000.  If a seller relied on Case Shiller index they could make an error in pricing that could cost them, in the extreme $250,000 in lost equity.  A boon for the buyer.  A buyer by locking-in to the Case Shiller national or metro numbers is mis-informed about the actual activity and demand for the neighborhood.  Not understanding the economic dynamics of the local market, creates a lost opportunity cost to the buyer.  This example is based on an actual condominium unit in my neighborhood, which by the way was listed for 8.5% above the 2006 purchase price and is under-agreement after a week and a half on the market.  Sounds to me like both the seller and the buyer had good advice.