Posted by Aaron Bosshardt, COO, Bosshardt Realty, 09/10/2009
Prominent prognosticator and financial guru Meredith Whitney called today for homes prices to fall another 25%. She cited unemployment and the lack of availability of credit.
Locally, we have had two issues as of late: Prices have fallen significantly this year in our area and continue to drop. According to the National Association of Realtors, Gainesville existing home median sales prices fell just over 11 percent in 2008. The local property appraiser told me they show the number closer to 5%. Either way you look at it, it looks like our prices have a lot more room to drop when you consider what has happened in other areas of our state, such as Orlando and Tampa.
So how much room do prices have on the downside? Tough to say. When I first tried to forecast this in 2006, I felt that, during the boom, speculators (those that bought real estate for short term flips) drove investors (those that bought real estate for long term investment) out of the market. I recently showed an investment property to a long-standing investor client of ours. The property was a great residential rental, close to campus, and had a nice separate apartment out back. It was listed for $209,000, but the owner was seeking a quick sale around 189,000. Based on the comparable sales, that number looked good. When I ran the numbers for internal rates of returns and capitalization rates, the returns totalled about 3.5 percent. A 10-year Government Treasury pays that and obviously doesn't have near the risk. Using the old rule of thumb that investors want a "10," the suggested price came out to be $129,000 - almost 30 percent less than what the comps indicated.
That number jives with Whitney's forecast of another 30 percent drop in prices. Other local experts I talk to seem to think we are close to the bottom. "We are there now, or close to it," said Ricky Nattiel. That might be supported by the fact that when the final numbers for 2009 come in, we could see a number closer to 30 percent in falling prices. "Foreclosures have really hit our area hard this year. We are seeing these properties come on the market sometimes as much as 50 percent below retail value," said Nattiel.
What might keep driving prices even lower? "Buyers are definitely still in the driver's seat, and that will continue to drive prices lower. Even in distressed situations, my buyers are submitting bids well under asking price," notes Janice Grounds, a local pet lover and condominium expert. This process of submitting low offers is often called "low balling" by industry experts. Then, as Whitney mentioned, the lack of employment and credit means fewer primary home buyers, and as I've shown you, investors and speculators (if there are any left) aren't going to be buying at these prices. Property taxes continue to increase for owners this year in spite of falling prices. A fact that hasn't slipped past the Gainesville Sun.
Of course basic supply and demand is at work in our local market as well. "Our Inventory isn't getting any better," said Chris Handy. "For every listing on the market, there are probably two shadow listings that aren't." Handy says a shadow listing is a home that would sell if the market could absorb it, but instead the owner just doesn't market it - a fact that may be reinforced by an article the Wall Street Journal ran recently: "The Reluctant Landlord," which cites Allstate as reporting a 27% increase in conversions from primary residence to Landlord policies this year.
I asked Summer Loduca, Business Development Officer at Bosshardt Property Management, what percentage of the inquiries she gets on new management services are from owners that can't sell. "All you have to do is look at our rental bulletin to see that one third of our available rentals are also for sale. That's never been like that before. I would say half our calls are from owners who can't sell."
It seems like there are many reasons for prices to go lower and few reasons for prices to go up. Oftentimes that is a sign that the end is near. Nonetheless, if you have a home that you can't sell, it may be time to determine whether you can afford to take the pain now, or sit on the sidelines for years to come. Every year we (property owners) think things will get better if we can just outlast the bad times. Since 2006 ,every year things have gotten worse. The people that sold in 2006 and 2007 are feeling pretty smart right now.
Are homes still being bought and sold? Yes, says Craig Wilburn, Vice President and Diamond Producer. "The market we are in right now consists of buyers that need to buy now and sellers that need to sell. If you're not in one of those two categories, it's unlikely you will buy or sell."
I'd love to hear why prices might be at the bottom or even increase if there are some counterpoints out there. The only one I can thing of is how great it is that Gator Football is in season again. There is nothing in the world that gets Gainesville to feel alive and well like the start of football season.
