Wednesday, April 23, 2014

Maintaining balance in an uncertain environment

From page HS3 | October 25, 2013 | Leave Comment

The $340,000 median price of a county home closing escrow last month was a bit of a decline from July and August. However, selling prices are still 21 percent above where prices were at this time last year. Over the last year we have experienced the highest rate of price increases since 2006. While homeowners and sellers celebrated, the rapid increase in prices was a concern to many housing economists.

Our current real estate market is precariously balanced in an uncertain economic climate. Like a playground teeter totter, its direction will be influenced by a number of forces that could push the market in one direction or the other.

Consider: The higher prices for county homes has resulted in fewer sales. Foreclosure and short sale activity is at the lowest levels in seven years and, as a result, investors have all but disappeared as a significant segment of the market. Interest rates are near record lows but have jumped 25 percent since May and are expected to increase further. The economy is expanding while fewer workers are employed. The stock market is at an all-time high while consumer confidence declines. Corporate profits are at record highs while the government is awash in deficits.

Sales activity is slowing. DataQuick reported 247 closed escrows in El Dorado County for the month of September. That’s a 9 percent decline from September of last year and a 20 percent decrease from August. The decrease in sales, however, is more than a seasonal adjustment. There are clear indications, from all over the state, that sales activity and price appreciation will be much slower over the next 12 months.

Last month’s closed sales are the result of sale-pending transactions that likely occurred in July and August when the market was more active. Based upon recent pending sales we can anticipate a further decline in sales through fall and winter. Sellers will need to get more aggressive in pricing their properties to compensate for the decline in sales activity if they want to be in escrow before next spring.

The shorter days and cooler weather are not the only factors slowing sales down. Higher prices, interest rate creep and a severe drop in consumer confidence are having impacts on prospective homebuyers. Homes that were selling in days at or more than their listing price are now taking much longer to sell and at a bit less than their listing price. The average time on the market for a home that closed escrow in September was 38 days and the average final selling price was 98 percent of the listing price. Price reductions are also more common. A year ago, during September, only one listing reported a price reduction. Last month 180 sellers dropped their listed price.

Another market change is the increased supply of new listings. In early 2012 monthly home sales began to exceed the number of new listings. This trend continued for 18 months dropping the unsold inventory index to less than a two-month supply of homes available for sale. More recently the number of listings has increased, exceeding the number of sales and our county’s unsold inventory index is now at five months, which is considered a balanced market.

A balanced market doesn’t favor buyers or sellers. In a balanced market, buyers will not usually pay over the listing price and will expect the home they are buying to be in good to better condition. Sellers do not feel pressured to reduce their asking price and seller concessions or credits to buyers are limited. In a balanced market, the average time on the market is 60 days, multiple offers are rare and sellers will receive 98 percent of their asking price. Naturally there are exceptions.

Most agents prefer working in a balanced market. Listing agents seem more responsive to requests for information on their listings. Sellers are more cooperative to showing appointments and all agents in general have a more congenial attitude about working together and solving issues. Both buyers and sellers become less concerned about price and focus more upon accomplishing their goals.

The challenge in free markets is maintaining that stability or balance. Inevitably an event will eventually occur that will tip the scales in one direction or another with consequences to both buyers and sellers. Consider the effect on home values or buyer demand should Congress eliminate the mortgage interest rate deductions. What would likely happen to interest rates if the federal government actually defaulted on its foreign debt? When Fannie Mae and Freddie Mac are privatized, what affect will that have? Will homebuyers be receptive to mortgage rates higher than 6 percent?

While many view the market’s slower pace as an ill omen, others welcome the reprieve. If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle and nobody wants that.

Zillow Chief Economist Stan Humphries said in a statement. “This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we’ve been experiencing and finding a more sustainable level. This moderation should help consumers feel more at ease in their decisions to buy and sell, and will help keep the market balanced.”

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at


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