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Short Sale Real Estate Sign and House

The housing market has been though a lot the last couple of years and most of it has been negative. There is constant news about new foreclosures and 98% of those who know what a short sale is had no idea 3 years ago. Personally I’ve watched the value of my house drop about 25%.

Where does it end? I’ve looked at some data this week that seems to indicate that the market here in the Salem-Keizer area may have bottomed out. Let me explain.

In Junior High, or now Middle School, most of us were exposed to the concept of Supply and Demand. The principals of supply and demand are easy to see in the housing market. Supply and Demand, more than any one thing, set the prices that homes are sold at. Throughout the last decade Government manipulated the demand and as a result this drove prices up. How did they do this? By changing the rules for borrowers. Traditionally the purchaser was required to provide at least 5% cash (down payment) on the purchase of a house. In reality, it was much easier if you had 10%. And you had to prove that it was your money and that you had the income to pay back the loan.

Eventually the federal government changed the rules so that it took little more than a signature to buy a home. As a result MANY more people were buying homes (Supply) and chasing after a limited supply of homes (Demand). Predictably this drove up home prices. In my case I watched the value of my home double in the 10 years we owned it. This demand also caused a building boom as builders tried to add more homes to the market to supply this new demand.

But alas, as was also predictable, many of those people who bought homes with little down payment either became overextended or lost a job and were forced to try and sell their home or even lost them to the banks. This, predictably caused a large oversupply of houses in an economy where there were many less buyers. Reversing the supply and demand caused prices to plummet as the smaller number of buyers now had many homes to chose from and could demand lower prices from desperate owners or the banks stuck with the foreclosed home.

Everyone has been waiting for the market supply and demand to come back in balance. This is the case where there are just enough buyers willing to purchase at the current market price to cause prices to stabilize (stop falling).

I believe we have reached that point in the Salem-Keizer market and here is why.

  1. Completed (closed) sales in June were higher than in June of 2010
  2. Inventory (homes for sale) have dropped to the lowest levels since the crash
  3. Both May and June 2011 compared to May and June 2010 saw sales go up while for sale listings are down.
  4. What is known as housing inventory dropped 30% from a year ago to 9.8 months. This is 67% below the the peak in 2009. This is the theoretical time it would take to sell all the housing on the market at the given level of current activity.
  5. The median (average) sale price dropped 16.5% from a year ago.
  6. Indications are that the prices have leveled out; overall they are no longer dropping or rising. This would indicate a situation where the supply and demand is the same.

For the market to turn around it must first reach the state of a balance supply and demand. I’m optimistic that we are there. Once other economic activity increases it will bring more people into the market for the same housing, causing a larger supply of people looking to purchase the same supply of homes. This could potentially cause prices to increase. Any increases, in my opinion, would be at a slower rate than what we saw this last decade.

It is interesting to note in the data that in late 2009 there was a sudden, significant three month drop in the projected inventory. This was followed by a sudden short term doubling of the inventory. This is a result of the governments effort to stimulate the market by offering the first time home buyers credit. This is yet another indication that government intervention doesn’t work. Maybe I’ll write about how this program, in the end, only provided money to the banks and not the buyers and sellers.

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