You’ve probably heard the term pent-up demand bantered about over the years. Pent-up demand is a term used in business to describe consumers who have held off purchases, bolstering savings accounts in uncertain economic times, and waiting for consumer confidence to increase before unleashing purchasing power.
We’ve certainly seen pent-up demand unleashed in the last 12 months as the 4th qtr of 2008 was nearly an all-time record in home sales in SW Florida, and the 1st and 2nd quarters of 2009 have been all-time sales records. We talked extensively how 1st time home buyers and investors have driven sales to record levels, but one thing that has been lacking is upward pricing pressure that usually accompanies a downward trend in inventory levels.
In order to assess what future pricing trends may hold, we first must assess what is selling now, who is selling now, and what potential inventory lurks on the horizon, and intermix that with current economic conditions.
As you can see from the attached chart, distressed sales accounted for 86% of the Lehigh Acres resale market, 71% of the Cape Coral market, and 66% of the Fort Myers market. These sales all occurred in the last 3 months. Distressed sales have actually fallen in Lehigh Acres and Cape Coral, and have risen about 4% in Fort Myers.
To answer the Who is selling, the answer quite simply is banks who have foreclosed, and home sellers who owe more than what the property is worth, and with the assistance of their lenders by agreeing to a short sale. Banks don’t always agree to a short sale unless the borrower has significant financial hardship, and even then these deals are tenuous at best.
In answer to what is selling, primarily the foreclosures have been entry level homes at bargain basement prices. We have recently seen some higher priced foreclosures, and we think more are in the pipeline. We have also seen some intermediate and slightly higher priced short sales selling, with a trend also to higher priced properties of late.
Let’s turn to what is Not selling. Many sellers cannot afford to sell due to depressed property prices, but they do not qualify for a short sale because they don’t have the necessary hardship to qualify. Other sellers cannot sell right now because they would not qualify for a new mortgage under current underwriting guidelines, so it’s best just to stay in their existing home and ride out the market.
This leads us to the reality that we also have pent-up supply. Due to record sales, our listed inventory has steadily been going down; however I think there is a lot more inventory that could be on the market if prices were higher. Because prices are low, many sellers who don’t need to sell won’t and will wait out the market. The only downfall with this strategy is that whatever these sellers would like to purchase to replace their existing home is also low right now, but will go up with the market. Sellers waiting for higher prices to replace their existing home will be paying a higher price for the home they purchase, negating any financial gain by trying to take advantage of bargains today.
Sellers today are in a no-win situation, unless they’ve owned their home for a significant time or put a lot down when they purchased. If you’re going to trade up you have to do it within the current market. As the market goes up and down, so does what you are selling, and what you are buying. There really isn’t a great way to time the market, unless you have the wherewithal to buy a bargain home now and either rent out the new home or your existing home, then sell one when prices are better.
Everyone wants to know when prices will return to what they were at the height of the market. The answer is they may never return to the frenzied level that wasn’t sustainable. If inflation returns like some think it will, tangible assets like gold and real estate typically do well. However, if inflation returns, those price gains may be down the road because inflation in the short term can stifle home sales. The other wildcards are the job market, the overall health of the economy, and the biggie might also be pent-up supply.
How much pent-up supply is out there? Nobody really knows, just as it was hard to know how many of the pre-construction homes were actually sold to speculators who said on their loan applications they were primary borrowers. These so called speculators would later lead to foreclosures and the mess we are in today. The builders may have had an idea when one person was buying seven homes, but there was no way to tell with all the people buying just one home back in the run-up.
The real test will be when everyone who wants to sell feels like they can, and what the supply and demand factors are at that time. Until then we have an artificial market, and any time you have an artificial market, artificial economic rules apply. This market is a lot like the Price it Right Game show. You don’t know what’s behind each door, and the only rule that applies is you must price it right to sell.