With the nationwide unemployment rate climbing above 10 percent, could 2010 see even more declines in real estate prices?

One of the most important influences on housing prices is the employment rate. When employment is high, people are more likely to purchase. In such an environment, there is optimism that if you lose your job, you will be able to find a new one.

Today, we’re facing some of the highest unemployment rates since the Great Depression. Is it possible that the housing market can make a recovery in light of these conditions?

Here are several key factors to determine what is most likely to happen in your market.

1. Markets aren’t just local, they’re “hyperlocal.”

Prices may be down in your state, county or city, but up in your local area. For example, it’s common for the first-time-buyer market to have shortages of inventory while the remainder of the market is glutted with inventory.

To determine what will happen in your local market, you must consider the “hyperlocal,” or “micro” market, conditions. In most cases, this means what is happening within a one-mile radius of where the property is located. It also means considering only those properties that have square footage and lot sizes within approximately 10 percent of your property square footage and lot size.

2. Months of inventory on the market are the best predictor of price changes.

Even though the National Association of Realtors is forecasting that existing-home sales will jump 10.8% in 2010, after a 4.8% increase in 2009, the real issue is how much inventory is on the market in your local area.

During the 35-plus years I have been in business, I have found the amount of inventory in a given location and price range to be the best predictor of what prices will do several months from now. As a rule of thumb, price changes lag behind inventory changes by about six to 10 months. If there are only two or three months of inventory in your market, chances are good that prices will be increasing in 2010. On the other hand, if there are eight or more months of inventory, your area may experience price declines well into 2010.

3. Extension of the first-time-buyer tax credit

While many people feel the first-time-buyer tax credit was responsible for the upswing in sales activity this fall, NAR reports that only six percent of the buyers attributed their decision to purchase this fall to the tax credit.

There are two key issues for 2010. First, will the extension of the tax credit produce enough buyers to create a price increase?  Second, what will happen to the market when the credit runs out?  Will sales drop as substantially as they did when the Cash for Clunkers car-buying program ended?  Will NAR try for another extension even though the Obama administration has signaled that  “this is the last time we’re going to be caving to the demands of NAR.”?

4. Demographics bode well for increased sales activity

Gen Y (born 1977-94) are now at their peak time for buying their first home. There are now more Gen Y’ers than there are baby boomers ( 1946-64). This huge cohort of young adults is marrying and having children.

In fact, the typical married Gen Y mom has 2.3 kids. Owning a home is part of their American dream. Although the unemployment rate is even higher among this group, most still have jobs. Coupled with the first-time-buyer tax credit, this could be a strong force to drive prices upward.

5. The Real Issue: Cost of ownership, not sales price

The real driver of price in 2010 will continue to be the cost of homeownership. This is a huge wild card for a variety of reasons.  If interest rates increase from 5% to 7%, or even from 5% to 6%, the impact on monthly payments would take a would-be-buyer off the market.

And changes of this magnitude could take place as early as 2010. The reason?  Interest in the sale of US Treasurys that are used to finance our debt is weak. This means that the government could raise interest rates to attract more buyers. The other issue is the decline in value of the US dollar, which, in turn, can result in inflation. The Federal Reserve typically responds by raising interest rates to cool inflationary pressures.

The third factor that could drive up the cost of home ownership is the decline in tax revenues at the local and state levels. This could result in increased property taxes in some areas. Increased costs shrink the pool of potential buyers, resulting in fewer sales and potentially a decline in prices.

Bottom line:  Watch the sales levels and the inventory in your local area. If sales are increasing and inventory is decreasing, look for stabilization of prices first and then, eventually, an increase.  On the other hand, if the inventory is static or increasing, 2010 will probably be similar to 2009.

Home sales continued to out-perform year-ago totals and prices continued to show signs of stabilizing, according to the latest report from the Northwest Multiple Listing Service.

Pending & Closed Sales Up Over 2008, Median Price Drops

Pending sales for November tapered off from the October surge, but Whatcom County experienced a 25 percent increase from the same period in 2008.

Closed residential sales increased dramatically from November, 2008. Closed sales were up 88 percent, due in part by lower interest rates and first time homebuyer tax credit. The other reason for such a dramatic increase is the tremendous slowdown that occurred last year at this time.

The median sales price is down about 7.6% in November (over November 2008), and down 7.1% year to date.

Inventory Almost at Balanced Market Levels

Overall residential inventory has decreased by 9% year-to-date. November, 2009 vs. November, 2008 numbers are even. For the month of November, months of inventory was at 7.5 months, as compared to November, 2008 when it was 16.5 months. Six months of inventory is considered a balanced market.

Average cumulative days on the market for November, 2009 is 157 days, which compares to only 126 days on the market in November, 2008. The list to sale ratio is at 89% for November, 2009, compared to 91% in November, 2008.

Finally, the absorption rate for residential sales for November was 13.3%. It was 6.1% for the same period in 2008. The absorption rate indicates how many homes are being sold as compared to the number of listings currently on the market. Since November of 2008, that rate has steadily increased.

Holidays can be a favorable time to sell

Buyers tend to encounter less competition for the most desirable homes during these winter months. Also, qualified buyers can expect above-normal attention from service providers who are experiencing a slowdown in their business, including lenders, inspectors, appraisers and title companies.

Agents are able to devote more time to clients and the smaller selection of homes on the market. Sellers can also benefit from showcasing their homes with tasteful holiday decorations, although home stagers caution them to show restraint and not overdo the décor.

In this housing market, not many positive records are being set. One notable exception comes as a great surprise to the casual market observer – length of time on the market. In this down market, well-priced home are selling in record time.

And time, as the old saying goes, is money.

Market is moving slower

With the torrent of down news about the housing market over the past couple of years, most people would expect that all homes are languishing on the market, just praying for a buyer to appear.

The market as a whole is certainly moving much slower than it did a few years back. The average market time for existing home sales now stands at 120 days, which is nearly 40 days longer than during the peak of the market in 2007.

But that picture alone is a bit deceiving; that’s not the whole story. A more detailed look at  today’s market reveals a different picture.

Overpriced vs. Well-Priced Listings

When we separate September 2009 home sales into categories of those that required a price reduction before selling (Overpriced Listings) and those that did not (Well-Priced Listings), we find that the Well-Priced Listings are selling in just 31 days.

As you can see in the above table, a different story emerges for the Overpriced listings. They average 137 days on the market (nearly four and a half times as long!), and they are requiring an average price reduction of 14% (that’s a difference of $42,000 on the selling price of a home that’s initially listed at $300,000).

That extra 4-5 months of selling time hurts in a couple of ways.

The financial impact

First, these homes end up selling for less than they could have if they had just started off priced right. Our market, like all others around the country, has seen declining prices over the past two years. Since the peak in prices in 2007, the average sales price has dropped about one-half a percent per month. That means the 4-5 months of extra marketing time cost the seller an additional 2.5%, or $7,375 for the median priced home of $295,000.

The emotional impact

So, the financial impact of pricing the home right is significant. The emotional impact is also huge. Five additional months of keeping the home in show condition, of the feeling of being in limbo, and missing the chance to move to that next home that better suits the seller’s current needs, are also a big part of the equation.

What happens when it’s priced right… the first time

More and more sellers are beginning to understand these factors. In September, 45% of sellers priced their home right and sold in an average of 31 days. Still not a majority of sellers, but the percentage is up significantly since the start of the year.

The overpriced seller should not beat themselves up too much. In a changing market, it is sometimes hard to know what the right price is.  Sometimes it takes entering the market to get feedback from buyers to know if the price is right. The key to finding the right price in those instances is to quickly review the market feedback and then make a swift price adjustment to bring it in line with the market. When done, our market’s steady activity tells us these sellers will find a ready and willing buyer.

Ever wonder what kind of impact a home purchase has on the local economy? Real estate costs, remodeling, buying new furniture, etc., all of those costs that go into buying an existing home, they have a direct impact on the local economy.

The National Assocation of Realtors conducated a study to find out just how much of an impact on the economy this purchase has. The NAR used the national median price of an existing home in 2008 for this research ($198,100), and here’s what they found:

Each home sale at the median price generates $63,101 of economic impact. This number is made up of the following…

Real Estate Industries: $17,829
Commissions, fees and moving expenses, or income to real estate industries, associated directly with the purchase are about nine percent of the median home price ($198,100).

Furniture/Remodeling: $5,331
Average furniture and remodeling expenses following an existing home purchase are right around $5,000, based on a Harvard Joint Center for Housing Studies figure (Improving America’s Housing 2003. Measuring the Benefits of Home Remodeling. Harvard Joint Center for Housing Studies Report: R03-1).

Mutliplier: $11,117
The Multiplier Effect accounts for the fact that income earned in other sectors of the economy as a result of a home sale is then re-circulated into the economy. The National Association of Realtors’s macroeconomic modeling suggests that the multiplier is between 1.34 and 1.62 in the first
year or two after an autonomous increase in spending.

What this means is that each dollar increase in direct housing activity will increase the overall GDP by $1.34 to $1.62.

New Housing: $28,825
Because existing home sales have historically been associated with new construction at a ratio of eight to one, we add in one-eighth of the new home price (the 2008 median new home price is $230,600, per the Census Bureau) to approximate the value of this construction being added to GDP.

The existing home price is not directly added to the economy because the home was produced or constructed in the past. Only the value-added service related to the sale of an existing home is included. When a new home is constructed, the entire price is added to the value of GDP because it is new production.

Total Economic Impact
So, the total Economic Impact of an existing home purchase =
$17,829 (Real Estate Industries) +
$5,331 (Furniture/Remodeling) +
$11,117 (Multiplier) +
$28,825 (New Housing),
for a grand total of $63,101.

Local Economic Impact Higher
The 2008 national median home price used in this study is about $82,000 less than the local median price of existing homes in Whatcom County ($280,000 in August). This tells us that the local economic impact of purchasing an existing home should be significantly higher than the $63,101 number found in this study.

Thanks to Rick DeLuca for the summary of this NAR study.