The Light at the End of the Tunnel

The real estate market is a micro-market industry. And what I mean by that is my market here in Northern San Luis Obispo County is different than, let’s say, Stockton, Miami, Detroit, Silicon Valley. The national numbers and statistics shared by big news media outlets is good information on the big picture level but about as useful locally as saying “The average high temperature in the nation today was 72 degrees”. So I keep a close watch on the local market and I’d like to share the silver lining I see in today’s local market.

The first thing to understand is that velocity, the number of sold properties, leads the market ahead of value, the median sale price of those sold properties. Kind of  like a leading indicator. Look at the Velocity & Value graph below. In 1989 the number of sold properties peaked and then went into serious decline into 1990 but at the same time, the median sale price was still climbing. The velocity bottomed in 1991-2 and showed significant improvement in 1993 and beyond. But value did not realize any significant improvement until 1999 – 2000. And then again the velocity peaked in 2004, began its decline in 2005 and beyond but value didn’t adjust downward until 2007, two years after the velocity peak.

Velocity appears to be a leading indicator in the real estate market. Keeping this in mind, let’s take a closer look at recent activity in my real estate market.

The Single Family Residential Monthly Sales graph below shows us the actual number of homes sold for each month since December of 2007. The straight line trend line indicates the number of sales is experiencing improvement through November 2011.

Pretty good, but let’s take a closer look. The Single Family Residential – Monthly Sales graph below shows the rate of change from one month as compared to the same month from the previous year, or the rate of change year over year. This is really exciting. Since December of 2010 we’ve experienced just one month of fewer sales than the previous year. That’s 11 out of twelve months of improvement and I’d like to point out – significant improvement! This is very encouraging. Has the velocity side of the market turned? It very well may have. When 2011 closes its books, there will have been more sales than 2010. That’s easy, 2010 was a dumper. There will also be more sales than 2009.

Will this trend continue into 2012? Let’s take a look. The Number of Pending Sales graph below shows us how many homes in our market area have a purchase contract in place and are working toward a final sale. Take a look at how consistently strong the pending sales numbers have been , particularly in the second half of 2011 when compared to the other 4 years illustrated. This is the demand and it has held steady well into the seasonally slow period in real estate sales. These pending sales will be reflected in higher sold numbers early in 2012. So I see continued improvement in the number of sales, the velocity, entering the New Year. Again, very encouraging numbers.

So based on all the stuff presented above, I’m pretty confident that the velocity side of the market has turned and is on the road to recovery. We probably bottomed in 2007, 2008 and 2009 showed some improvement, big stumble in 2010 and now 2011 seems to be back on track.

Let’s take a look at value and the Single Family Residential – Median Sale Price by Month graph below. We see that prices are lower today than they were in December 2007. I feel the pain. But check out the Single Family Residential – Median Sale Price rate of change graph below that. This graph shows a slowing in the rate that values are declining. And November 2011 had significant improvement over 2010. My preliminary numbers indicate that December 2011 will be slightly better than 2010 as well.

Is the value side of the market bottoming out? It very well might be. The Supply & Demand graph below shows us the relationship between fully available homes on the market and the pending sale homes. I like to call this the demand ratio. When I first started tracking this information in June of 2006 we had loads of available homes with modest demand at a ratio of 16.82%. The demand ratio fell to a low point in late October of 2007 at 7.9% of homes on the market had a purchase contract in place. The demand ratio experienced upward movement through 2008-9, stumbled in 2010 and has shown steady improvement late into 2011 reaching a high point on 11/28 at 40.13%. This high ratio is a result of steady demand as we discovered in our look at the velocity side and low supply or inventory levels indicated by the green area on this graph. Where does the demand ratio have to be to start applying upward pressure on value? We may be reaching that point. Property values may be bottoming out now. But as we saw in the very first graph above, value, once turned, takes awhile to accelerate. There are many variables out there that suggest prices will not climb quickly anytime soon. Pent up inventory of distressed sale properties not yet on the market and equity sellers who want to sell but are waiting for a better sellers’ market before jumping in will keep values from improving quickly.

All that said and summarized in a nutshell; I am optimistic about the direction our little micro-market is going. Demand is good. Sales are up. They should be. We live in a very desirable area. Value may be bottoming out as indicated above. These numbers indicate that 2012 will be a sound year in our real estate market.