The most asked question I get, both in daily business and on Facebook is, “Are prices about to spike up?” People are reading that inventory is shrinking, and buyers are buying all the foreclosures faster than the banks can bring them to market. People assume the foreclosure pool is diminishing and we’re about to run out, and of course they want to know how fast and how much prices will rise once that happens.
It is true, to date buyers have been soaking up the incoming foreclosure inventory and whittling down the existing inventory. Banks have been allowing short sales to some degree for qualified sellers, and in some sub-markets we are running low on inventory. The chatter these days seems to be that prices are headed up in a big way, so let’s explore what’s really going on in the market today, and what may happen in the future and why.
Median single family home sale prices have gone up for two straight months, but only marginally, up 1.25% in July and up .34% in August. The median sales price now stands at $89,300, up from $87,900 in June. Are all prices going up? The answer is no. The definition of median sales price is that half the sales occur over the stated number and half occur under, which now stands at $89,300.
What is actually happening is the bottom has firmed up, and it’s getting tougher to find some of the bargain basement deals. Homes in Cape Coral under $90,000 are getting harder to find, as they were somewhat plentiful last year. The bargain deals have swung to Lehigh.
The other interesting phenomenon is that mid and upper priced homes are falling in value. As these homes become bargains to their selective buyers, they are selling. As these mid and upper priced homes sell, they actually pull the median sales price up, even though those home prices are falling. Remember back to the definition of median sales price.
In a few months people will start reading that prices are on the rise, when in fact prices are falling in the mid to upper tiers, and prices are rising in the lower tier. Very soon the median sales price may begin to rise as it gets hit from both sides of the curve, however when you read that prices are rising, you have to remember that all real estate is local, and even Lee County has submarkets that are different.
In some cases properties are cash flowing for investors at today’s prices, which was unheard of in years past, even before the run-up. We believe now is an unprecedented time to be buying real estate in SW Florida as prices are so far below replacement cost that builders cannot compete, so building has been silent.
We believe there will be more mid to upper priced foreclosures coming to the market in the next year, as more Alt-A mortgages are foreclosed on as scheduled interest rate resets take effect. We’ve seen most of the sub prime loans already come and go from the market, so the next wave should be the Alt-A and the economy driven foreclosures as regular people who have lost their jobs due to the falling economy.
As you can see from the chart, median home sale prices are back to 1993 levels, but replacement costs to build are still at 2003 levels. Our market won’t fully take off until we reach equilibrium on a broader scale reaching not only the bottom tier, but also the mid to upper tiers as well.
So the answer as to when will our market spike up to where it was at the height is complicated. The answer is it may never spike up to where it was, as those numbers were irrational and not supported by any sound financial basis. However, the opportunities that lay before us may also be unprecedented, and because of the over-correction of the market dues to the financial crisis, foreclosures, credit becoming scarce, and over-supply, prices in many sub-markets are already on the rise. Prices in the mid to upper markets will rise again; after they potentially fall some more, and the opportunity for home buyers to purchase at affordable prices and potential investment opportunities have many insiders excited.
Remember the herd mentality. When prices are at their height, most think it’s the time to buy, and when prices are at their low, most believe the sky is falling and time to run for the hills. The smart money is back in, selectively, and they’re buying. The opportunities today exceed perhaps any other time in the last 40-50 years.
So when you read, prices are falling, or prices are rising, be sure to dig deeper and analyze what it really means. Chances are, both statements are right, but in the analysis lies the true opportunity and wisdom.
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