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A real estate forecast for the near term future

By Dave Parrish

Here we are, a full three months and a few days into 2013 and experiencing a sellers’ market, some seven years after the commencement of the fall of the housing market. For those who watch the numbers, there’s no doubt that there has been a dramatic shift in a number of measures. Among those are: interest rates, housing affordability, inventory levels, changes in lending practices/requirements, foreclosure rates, shadow inventory and the direction of housing prices.

The problem with all these numbers is understanding what they mean to the reality of buyers and sellers. Rather than going into the high weeds of explaining in detail each of these components again (I have previously done detailed explanation of all these factors in this column), I want to focus on what these collective trends indicate as the near term future (the next 18-24 months) for the real estate market in the metro Birmingham (Jefferson, Shelby and St. Clair counties) market.

• What is the key factor driving the market change? Demand vs. supply.

• What’s causing the change in demand? Life events, foreclosure victims returning to the market place, greater housing affordability vs. higher rents, improving economic conditions.

• What’s causing the reduction in supply/inventory? Reduced number of foreclosures, investors snapping up inventory to add to their rental portfolios, reduced number of sellers capable/willing to take the big hit in perceived market value or bringing money to the table when selling their homes.

• What is the result of the change in the demand vs. supply ratio? Multiple offers resulting in calls for highest-and-best offers have become commonplace, prices have begun a gradual increase. Anticipated appreciation level for 2013 is in the 4 percent neighborhood.

• Won’t the imbalance in supply and demand cause sellers to be able to do better than they have? For the best properties that are well priced in the correct price range, sales will occur faster. However, it will take time for the losses of the past seven years to be made up. Appraisal rules enacted several years ago create a governor on how fast prices can rise, since most sales remain financed sales. While the market has turned toward a sellers market, that does not mean buyers will respond to properties priced higher than the market, especially if the sale must be financed. Note: By definition, a sellers market is defined by the ratio of homes for sale versus the demand for housing. Once the number of homes for sale in a given market is less than a six months inventory (based on the previous six months’ demand/sales), the market is defined as a sellers market. A good rule of thumb is the golden rule: “The man/woman with the gold makes the rules.” Even in a sellers market, that rule cannot be forgotten.

So what’s going to happen?

My prediction is this: The gap in inventory will largely be filled by new home construction. We’ve seen a big move in housing starts over the course of the last 12 months. That trend will continue and even pick up pace, unless we are confronted with some new economic disaster.

Sellers of existing homes will still need to come to terms with a loss of perceived value for some time to come. My prediction remains somewhere in the 2016-2020 time period. The decision to sell will remain one based on a real need: job transfer, job loss, marriage, divorce, death, births or a strong desire for change. The individual time frame for each seller is different. The market will be a little friendlier for those who have something the market wants. All the while, new home construction will be raising the bar in terms of what buyers want.

Buyers, the bottom of the market has passed, so quit waiting for lower prices. Look instead at home affordability. That’s the cost of home ownership, and it’s at an all-time low. Interest rates aren’t going lower and mortgage terms aren’t getting better. The real deals are getting harder to find. The steals for those that are looking for something close to move-in ready are for all intents and purposes gone.

May the market be with you.

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