What is going on with inventory and prices?

The Wall StreetJournal   is on the bandwagon about rising prices. More “Happy Days are Here Again” playing in the background. 

The number of homes listed for sale at the end of 2012 stood at the lowest level in more than five years, a development that helps explain why home prices have rebounded so strongly over the past year.

I had some fun with these interactive graphs http://blogs.wsj.com/developments/2013/01/16/housing-inventory-ends-year-down-17/tab/interactive/ today. Because they are working with median price averages for the whole area, and not my particular towns and cities, they are not as meaningful as local market information would be. 

I added Boston into the first tab “most expensive.” (You can do that by clicking on the list below.) I am happy that we didn’t make the list of the most expensive markets in America. Orange County, San Diego, Washington and New York hold those top spots. 

Here in the Boston area, the median price changed from $333,000 in May 2011 to $345,000 in May 2012. That is a price rise that matters. If you look at the Boston line, you will see that prices were flat in the Spring of 2011, and rose sharply in the Spring of 2012. That is the difference that my clients felt last year. When the market is flat, buyers don’t have as much pressure to buy now, or suffer higher prices later.

The more telling chart is the inventory chart to the right. Boston has its normal seasonal inventory curve. That humped shape is typical of a large increase in listings in the spring and the lowest ebb in the winter. (New York has one, too.) What we really felt last year was the depression of the seasonal hump. In 2011, there were roughly 31,000 properties for sale at peak, whereas in 2012, there were roughly 25,000. Boston’s inventory shortage is more dramatic than the highest-priced markets in America. Look at the chart below the graph. You will see only a few other places that have inventory declines in the teens, like our decline of 15.8%. Our prices are not suffering a staggering increase. This is the good news for buyers.

My advice for buyers is to keep their eye on the value of any particular property you might like to purchase. Ignore the hype that is all over the newspapers. Considering how steep our inventory shortage is, we still have a pretty stable market. Poke around on these charts for yourself.

A Skeptical Look at those singing “Happy Days are Here Again.”

As I told you Tuesday, FNC is my new favorite valuation system. Especially here around Boston, where house condition is a key factor in valuation, FNC gives me the best information.

The latest FNC Residential Price Index™ (RPI) shows that the recovery of U.S. property values has continued through November—the ninth consecutive month of price gains driven largely by rising homes sales and moderate economic growth.  This is consistent with the chorus of economists and Realtors® singing “Happy Days are Here Again.”

The national survey numbers are on their chart. Notice the bubble lines on the three levels of composite indexes that FNC creates. They are pretty pronounced. The songs of joy are because of the little tail of blue above the zero shaded blue year-over-year data. This indicates that the real estate market has hit bottom. The thing I like about FNC is that it is also remarking on the “why.” As in “why are we seeing a recovery in prices?” They report:

“An imbalance between rising demand and limited supply continues to be an important factor for sustained price momentum. While signs of market recovery have instilled confidence and driven up demand as potential homebuyers take advantage of low prices, the supply of homes for sale has been constrained due to rising homeowners’ expectations about a continued price increase in many fast-rising markets.”

Increased demand and limited supply is not good for my clients, the buyers. So my song is “Ain't Nothin' Gonna Break my Stride”  (Ain't nothin' gonna to break my stride. Nobody's gonna slow me down, oh-no. I got to keep on movin' Ain't nothin' gonna break my stride. I'm running and I won't touch ground. Oh-no, I got to keep on movin'…)

And now for a little fun with numbers. Go to the FNC data page. On the Filter bar, choose “All Northeast Region MSAs” Date range: January 2000 to January 2013. Then hit the green “Compare” button on the right. 

First look at Boston Metropolitan Statistical Area (MSA) compared to all the Composite Indexes above. Boston looks much less like the hump of a camel. The Boston bubble was edgier. In places without winter and places without such a huge concentration of college-affiliated employment, the seasonality is not as big a factor. So, when a composite is created, the edges wear down. The shape of the Boston area curve - going up from 2000-2006 -- has been described as an “inverted S curve.” The prices were highest in the spring market and again in the fall market. Since we hit the top, in 2005 and again in 2006, the curve has gotten more chaotic. So has my life as a Buyer’s agent. (“Ain’t nothin’ gonna break my stride…”)

The Northeast data is limited to New York and Boston. Look at Boston MSA compared to New York MSA. Boston rose faster, but not as high. Boston hit bottom sooner and has been bouncing along the bottom for the past three years. New York hit bottom in 2011, a full two years later. You can tell that these guys are from the South, since they are claiming Washington DC and Baltimore in the Southern region. Add them in and take a look. You’ll see that Boston had a pretty mild bubble compared to Northeast and Mid-Atlantic cities in this Index.

The Mid-West region had no profound bubble, except for Minneapolis. In the South, the bubble was muted in Atlanta, the Texas cities, Nashville, and Charlotte. In the West, Denver didn’t have much bubble at all. California went nuts; quite the camel hump. Southwest cities went up, and then fell much harder, due to overbuilding. 

What does this tell me? That this will be a year of high demand. A year when buyers and their agents will need to be at the top of their game to get offers accepted with reasonable terms. (“Ain’t nothin’ gonna break my stride…”)

Real Estate Valuation. A very basic lesson

This week, a new report came out from my favorite valuation source. Before I write about that report, I want to give enough background so that new readers can understand the importance of what is being said. Today, I start from the beginning, earlier than 101, to explain how real estate data is collected and what it means.

When you don’t have enough data, or data that is too heterogeneous, averages and medians do not tell you anything that is helpful. 

An average is derived when you add all the data points together and divide by the number of data points. So, averages can be changed dramatically by one or a few very high or very low figures in the data. The average of 1,2,3,4,5,6,7,8,9,10 is 5.5 (add them to 55. Divide by 10 to get 5.5) That seems right; it’s sort of in the middle of these numbers. But, if there is an outlier, high or low, look what happens: 1,2,3,4,5,6,7,8,9,10,74. (Adds up to 129. Divide by 11 equals 11.7.) That number, 11, does not reflect the vast majority of numbers in the series. That’s why, in real estate, a single million-dollar sale in a modest town makes the average sale price figure for that town higher than it should be.

A median is derived when you choose the figure that is in the middle of the data set. Using the two examples above, the median is 5.5 in the first group (somewhat reasonable) and 6 in the other (also fairly accurate.) Median is a better figure since a few very high and very low data points don’t mess it up so much when you have a larger group of numbers than the example above. But, median figures don’t tell you enough about how high the highs are or how low the lows are. They also don’t tell the concentration of property prices. Are there a lot at the high or low end?

At best, a median price for all houses of a specific size in a specific town can give you a guide to what you may need to pay for a house like that in that town. But, a median price for all the houses in the town doesn’t tell you much. 

Year over year median or average prices can go up or down because all real estate is getting more expensive or cheaper. It can also go up because a town has a new development of expensive housing at the same time that modest housing prices are going down. You cannot know which is true by looking at median prices alone. 

Got it? Tomorrow, I will write more about valuation systems.

The inventory problem

The biggest problem that my clients and I faced since the end of the real estate bubble has been the housing stock around Boston. The housing stock in Massachusetts, by and large, is old: not Colonial-era old, rather, Industrial Revolution-era old. Large tracts of housing sprang up in cities and towns throughout Massachusetts between 1880 and 1930 or so. Much of this housing stock is still here. Much of it is sturdy, wonderful construction. Some of it was built poorly. Some is not aging gracefully. Some has been well looked-after. This makes condition a wildcard.
Not only is the housing stock old. Some is run down. Some has been renovated weirdly. So, when a well-renovated property shows up on the market, it is a strange and sought-after gem, if it is a desirable size and in or near a desirable location.
There is a mismatch between the housing stock in some areas and the people who want to live there now. Much of the housing stock near the Red line was built as two-family and three-family housing. To varying degrees, the two-family housing is morphing into condos since the 1990s. The number of single-family houses is relatively small. Looking at the 02144 zip code - which is West Somerville - there are 612 single family houses, 1254 condos, and 3272 two and three family houses in the Assessor’s database. Similarly, in the Central Square Cambridge zip code -02139 – there are 771 single family houses, a whopping 4489 condos, and 1688 two-family and three-family houses.
What has happened since the recession is that more of my clients are heeding my warnings about the costs of trading up. They are looking for a place that they can keep for the long haul, either as a “forever house” of as a future investment property. My clients are not the only ones. I am seeing a very sharp divide between properties that are in the “good location” neighborhood and towns and those that are in less popular spots. I also see more people rejecting properties that are too small or too run down. The marketing difference is profound between those that are potential “hot” properties and the rest of the inventory.

Factors that are leading to “hot” housing:
Mostly, owner-occupying buyers are buying for keeps. They are reluctant to compromise on location or size, since they are there to stay. Today’s buyers are not blind to history; they don’t want to be in the next wave of buyers stuck at the top of the market.
Locations: Close to subway lines, walking distance to town centers, within a half hour commute to Boston, houses in towns with a good school reputation.
Size:  Condos: Two-bedroom or bigger, two-level, those with good yards, those with two non-tandem spots. Houses: Three-bedroom houses with three real bedrooms (not a third that is really a study,) four-bedroom houses with two full baths. Multifamily: Two-family or bigger properties that are big enough to rent for a positive cash flow.