Market Trends Back to Articles

Housing Market Outlook

A minor correction or new direction?

Across the country, the slowdown in the market has created longer market times, which can cut into profit margins for investors. “A year ago the time on market in this area was ‘officially’ 45-60 days but in reality, new listings were often sold within two weeks,” Tierney said. “Now the average is four months. There’s definitely been a slowdown.” The softening is being felt across the board in many towns, from Miami to Austin, Texas.

In many markets a recent construction boom has created a significant oversupply, leaving buyers with plenty of inventory selection. The surplus of inventory is pushing prices down. A home that would have sold for $350,000 a year ago, might sell for $300,000 today, as sellers compensate to overcome a slow market.

“I wouldn’t say that there has been a (bubble) burst or crash, but more like a market correction. Things were getting a little crazy there for a while, and it’s natural for the prices to come back down at some point,” said Tim Tierney, a real estate agent with Re/Max Executive Realty in Franklin, MA.

In some markets—such as Miami and other Florida cities— overbuilding has lead to extreme conditions. Many investors put deposits down as new condominiums were first being marketed, planning to resell them as the building was constructed — and prices appreciated. The appreciation did not occur, as many new projects were started based, in part, on artificially inflated demand. The glut of inventory has drastically changed the outlook for many investors, forcing some to walk away rather than close on a property.

“People are walking away from their investments,” said Honore Frumentino, a real estate agent with Koenig & Strey GMAC Real Estate in Deerfield, IL who also is knowledgeable about key Florida markets. “They bought properties as an investment to flip them and rather than carry the costs, they’d rather walk away and take a loss.”

In some parts of the West Coast, which has also seen significant price swings, a similar story is taking place. Some owners are being forced to “sell short” just to reduce their long term financial exposure.

There is a silver lining in all this market activity, however. Current market conditions, as soft as they may be for some, are creating a wealth of opportunities for others. Investors are going into depressed markets and buying properties at low prices, hoping to ride the next real estate cycle upward.

Experts warn, however, that caution is needed. Before jumping into the market, investors should carefully consider the fundamentals. “If you’ve got people discounting prices it could be a good time to invest, but you have to do your homework,” said Walter Molony, a spokesman for the National Association of Realtors.

That homework should include running realistic financial projections on your targeted investment segment. When buying property to rehab and resell, for example, those projections should include conservative estimates on what the property will sell for when fixed. However, in a market where demand has softened and prices have fallen, projecting a selling price months down the road can be a tricky proposition.

In many areas, potential home buyers are waiting on the sidelines, causing rental vacancy rates to decline and rents to rise. This is good news for investors who can find the right property, add a fresh coat of paint, complete relatively minor repairs and get it ready for new tenants without spending a lot of money. However, before buying any rental property, investors should carefully study vacancy rates, and trends, for the given neighborhood.

Those who are rehabbing should consider homes with enough space for an additional bathroom and/or bedroom. This can go a long way in positioning the house for sale in this market, as it can broaden the home’s appeal and potential value, said Tom Stengren, a vice president and branch manager with Starck Realtors in Arlington Heights, IL, a northwest suburb of Chicago.

Rehabbers should be realistic with their profit projections, however. “Some investors are trying to fix up and create more space and sell it for $100,000 more than they bought it for,” Stengren said. Instead, do your homework to determine what houses with that extra bathroom or bedroom will sell for in this market. When planning improvements, be cautious about putting too much money into the house.

The key, experts say, is to know, understand and be guided bythe local market. Regardless of the investment approach, investors should carefully review the demand side of the equation, identifying the type and size of property that is most sought after and perhaps in the shortest supply. In this analysis, specialized niche opportunities may become apparent and provide the greatest investment returns.

“If you are doing your homework, studying cash flow and looking atmarket rents in the neighborhood, you could do well,” Molony said.

This approach works particularly well in areas where housing prices have fallen below replacement cost. “Texas is a good example of a place where I see a lot of value priced inventory,” said David Hehman, president of EscapeHomes.com, an Internet real estate listing service. Towns such as Austin have a growing population and a large supply of homes priced below market. “You buy a house for $200,000 and your rental income is going to be more than your costs,” he said.

Investors should take a cautionary approach, studying the market for rent rates on comparable properties and carefully analyzing their anticipated expenses. In addition, it is important to plan sufficient reserves in case the rental doesn’t work out or the house will not sell.

For those planning a quick flip, more than ever, the key to success is buying right. Once you become a seller, you may have to make concessions you hadn’t planned on, or face a longer selling cycle as the market labors to absorb excess inventory. Across the country, the slowdown in the market has created longer market times, which can cut into profit margins for investors. “A year ago the time on market in this area was ‘officially’ 45-60 days but in reality, new listings were often sold within 2 weeks,” Tierney said. “Now the average is four months. There’s definitely been a slowdown.”

The same holds true in the Chicago area. While the Midwest has not seen the wild price fluctuation seen on the coasts, the slowdown has pushed market time from 30 to 90 days on average in some suburbs. Some properties that are not as pragmatically priced have been sitting for a year or more, Stengren said.

Investors with unrealistic expectations are getting hit with a double whammy… additional holding costs as they carry the property longer and, potentially reduced selling prices following the extended sales cycle. “Last year people were getting asking price or over, now we’re seeing sellers having to lower their asking price 2 to 3 times before they get an offer,” Tierney said. The same is being seen in many Chicago-area towns. “Buyers are making offers that are ridiculously low — $30,000 to $40,000 less (on a $300,000 house), which would have been unheard of a year ago,” Stengren said. “The sellers are always the last ones to figure it out.”

The double hit for sellers is that those low ball offers are coming in after the property has been on the market and seen a few price drops. Market conditions are forcing many sellers to negotiate, however, instead of rebuffing the investor’s low offer. Some sellers are failing to consider all of the market factors when determining an asking price. While a comparable house may have sold at a higher price sixmonths or a year ago, perhaps even been bid up by multiple offers, markets change. Today’s increased inventory means buyers have options. And an oversupply of inventory can deflate price rapidly.

While there has been much talk about the slowdown in the housing market, there remains much optimism about the fundamentals that have kept this real estate engine going for many years. Experts point to several reasons why the impact will be not be severe in every market. A growing population of Echo Boomers (born between 1982 and 1995), a stable economy and favorable interest rates all are helping to keep the housing market chugging along, Molony said.

Like any investment vehicle, “corrections” take place. Because the recent real estate boom lasted so long, however, many people — especially newcomers to the market — became accustomed to strong price appreciation and expected it to last forever. There also are many demographic shifts that will fuel growth in some regions. For example, the Baby Boomers are expected to continue to impact housing in key Sun Belt, desert retirement and secondary home markets. In addition, the United States population is expected to hit 400 million within the next 20 years, fueled by immigration and births.

The economy also is showing positive news for investors. While interest rates may be higher than a year ago, they remain favorable for investing. And, inflation is low, which creates more buying power and consumer confidence.

How To Invest In A Cooling Market

If you are looking to get into this investment market, experts suggest a careful and focused approach. Determine what type of investment is best suited for your situation. If you want a longterm investment, then certain rental markets might bring solid rental income and the potential for price appreciation as the market recovers. The key is to “buy it right” and negotiate the best price going in. By doing research into the market, you can determine that certain houses have been on the market for a long time. This typically makes them easier to buy at below market rates. This type of approach leaves you some wiggle room if you discover unexpected construction surprises or if the market shifts again.

How To Sell In A Buyers Market

If you are planning to sell in this market, the key is to be realistic.While the days of hefty profits may be behind us, there still is money to be made if homes are priced realistically. “People have an inflated sense of what something is worth and you need to let the market set the price,” Molony said. Houses that are in good condition, with fresh paint and décor and working mechanicals, have always fetched top dollar. That “move in condition” is particularly important in today’s market, when inventory is high. Realtor Frumentino recommends that sellers take a close look at other houses on the market and find creative ways to distinguish themselves from the competition. This may involve hiring an interior decorator to give the home more pizzazz or throwing in some extra amenities. In the end, investors who watch themarket carefully and work with conservative profit estimates can stay ahead. And, the units that are priced competitively will sell. “Real estate is always a good investment,” Frumentino said.