Nevada County Real Estate Market Snapshot – Summer Trends
Paul Sieving - www.PaulSieving.com
September 14, 2009 – Early in the month, there were 858 active single family listings in our western Nevada County real estate market. This number has been fairly steady for the last 6 months.
This number includes all 3 of the segments we have been discussing: Orderly non-distressed properties, bank-owned REO properties and Short Sale properties. I’ve broken down the active and pending listings by segment in the table below.
Single Family Pending Sales Index for September
Active Listings Pending Listings
|
Total 858 |
136 |
|
Orderly 641 |
85 |
|
REO 43 |
36 |
|
Short Sale 174 |
15 |
We’ll be tracking these figures going forward to gain an understanding of the closing rate for each of these segments. In other words, in a given month how many properties are in escrow, how many actually close, and how do these trends vary by segment. Closing rates have a strong effect on absorption rates, and can be an indicator of secondary factors, such as availability of financing.
In an earlier column, we looked at absorption rates for the 3 segments and for the market as a whole. The overall absorption rate for the month of June was about 10%. Orderly sales were the same, while REO sales were clipping along at 30%, and Short Sales were lagging at about 4%. In the table below are the comparable figures for June, July and August, as well as the median price.
Single Family Sales – Monthly Unit Volume by Segment
June 2009 July 2009 August 2009
|
Total Units 89 |
82 |
76 |
|
Orderly Units 70 |
51 |
31 |
|
REO Units 13 |
20 |
29 |
|
Short Sale Units 6 |
11 |
16 |
|
Med.Pr. $299,900 |
$320,000 |
$297,000 |
There are some striking trends in this table. While the overall absorption rate is holding steady at around 10% with a minor downward trend, the mix is changing dramatically. The absorption rate for orderly sales has fallen from about 11% to less than 5% over the 3 month period, while the rate for REO has increased from an already snappy 30% to a positively torrid 67%!
Likewise Short Sales have increased from under 4% to over 9%. This change in the sales mix, while the overall sales rate holds relatively steady, is a positive sign for the health of the market.
What appears to be happening is that the focus of buyer activity has shifted somewhat from orderly sales, which made up nearly 80% of units sold in June, to distressed properties, which in August accounted for 60% of units sold. This is healthy for the market in the sense that we are seeing the distressed properties being snapped up at a rate that is keeping the overall inventory of REO and Short Sale listings steady and avoiding a buildup of these properties in the market.
This is a very interesting trend and will be worth following as a reliable indicator of market health.
Throughout this period of change in the mix of properties sold, median price had been fairly steady, with less than a 1% decline in the 3-month period.
We are looking for data that we can make sense of, both leading indicators and trailing indicators, in keeping an eye on the health of our local market as we seek visible signs of a recovery.
Nevada County Real Estate Market Snapshot – Absorption Rates
Paul Sieving - www.PaulSieving.com
August 17, 2009 – The listing count for Single Family homes in Western Nevada County has been relatively steady at 800-850 over the first 6 months of 2009, with a slight upward trend, and is currently at 854. Even with the fairly steady inventory, sales volume is up considerably in the second quarter compared to the first quarter, an increase of over 50%.
The absorption rate for a market is the percentage of total inventory that is sold in a given month and is related to the supply of homes. For example, a 10% absorption rate represents a 10 month supply of homes and a 25% absorption rate reflects a 4 month supply of homes.
For the month of June 2009, during which the total listing count was approximately 850, 85 homes were sold. This is an overall absorption rate of 10% or a 10 month supply of homes. This compares to the supply in a “normal” market of approximately 5-7 months, and to the year ago period when the supply was approximately 14 months. Unit Sales have improved in the second quarter of this year.
When we break down our total inventory into the 3 main categories of non-distressed sales, short sales, and bank owned properties (REO), we see varying absorption rates. The breakdown is as follows: Of the 855 total listings, 677 (80%) are non-distressed, 140 (15%) are short sale, and 40 (5%) are REO.
The absorption rate for non-distressed properties mirrors the overall rate at 10%, while the rate for REO is a whopping 30%, and the rate for short sales is under 4%. The REO properties are selling through quickly, with a 3 month supply, the non-distressed sales are at a 10 month supply and short sales are above a 2 year supply. This is a highly segmented market and will slowly converge as the recovery unfolds.
What this all boils down to is that the overall market is recovering, the REO properties are selling quickly (this is key to the recovery) and short sales remain the most challenging segment of the market, with lenders seemingly preferring to foreclose rather than to accept short sales. As a result, most of the short sale listings will eventually go through the foreclosure process before selling in the open market.
We would like to see a longer trend of brisk REO sales and a continuing decrease in the overall supply of homes before we claim that a recovery is underway, yet the signs are encouraging.
Nevada County Real Estate Market Snapshot - How the Housing Bubble is different
- Paul Sieving www.PaulSieving.com
August 2, 2009 – In earlier housing cycles, such as the early 80s and late 90s, the housing decline was a secondary effect of a different economic problem. In the 80s, it was more or less due to closing of defense industry plants that were tied to old technology and wars like Vietnam. A “Defense Bubble”, if you will. California was particularly hard hit, and actual housing prices didn’t go down very much, but there were many people out of work.
Then in the late 90’s/early 2000s it was the Internet Bubble, and again housing prices didn’t go down too much, but a lot of people were out of work. What these two cycles had in common was that some folks couldn’t keep up with their house payments, and lost their homes, but in many cases they still had plenty of equity.
What’s different about this cycle is that it’s a Housing Bubble, and home prices have gone down so far that many people, even some of those who are able to keep their homes, have no equity, even negative equity (underwater) in many cases.
When a home in foreclosure has equity, it will often sell to a private party at the Trustee’s sale on the courthouse steps, because the minimum bid is the loan value and the actual market value of the property is higher. In this case, the property will sell at or just below market value in an auction on the courthouse steps. The buyer may capture a small amount of instant equity and look forward to some market appreciation plus whatever value they can add by improving the property.
In today’s market, the vast majority of homes that are in a Trustee’s sale have no equity and in many cases the loan value is quite a bit higher than the market value. Again though, the minimum bid will be the loan value, due to flawed bank policy that hasn’t kept up with the market. So no buyer in their right mind is goingto pay more than market value at the courthouse steps, and the bank ends up repossessing the property. Then the property goes through the whole process of foreclosure and is placed back on the market by the bank.
As much as the bank would love to price the property at or above the value of the foreclosed loan, no-one would buy it, for the same reason it didn’t sell on the courthouse steps. So they price it at market value or maybe just a tad below so it will sell faster. That’s what we are seeing today, a lot of REO properties, priced more or less at market value relative to other properties on the market.
The way to add value in this market is either to improve the property (sweat equity) and bring it up to a higher segment of the market, or to improve it to a certain minimum level and convert it to a rental property.
At least for the time being, the days of buying instant equity on the courthouse steps are gone, and the discount available in the REO market is minimal. There is a wealth of opportunity just the same. Every now and then, a property comes up that is so trashed, they almost give it away (at land value), and for the seasoned homebuilder or experienced carpenter, this can be an opportunity to do a total rebuild and capture some instant equity (profit), just like a homebuilder would, starting from scratch.
That’s the best I can do to explain why this market is different because we are still figuring it out. The books that have been written up to this point on how to make money in foreclosures are based on earlier market cycles that were not “Housing Bubbles”, and so they are not necessarily relevant to the opportunities of today.
In today’s market, prices have fallen so far in an over-correction that most of the upside is in future appreciation, plus whatever sweat equity is added by the buyer, or the rental income from converting the property, or both.
Buying Investment Property – Making money on the way in
- Paul Sieving www.PaulSieving.com
July 15, 2009 – The Investors are coming, the Investors are coming! Since late last year, according to the California Association of Realtors®, buying activity by investors has been on the upswing in many California markets that have been hard hit by the recent correction in the housing market.
During the peak of the boom in 2004-2005, there was a rush by investors to buy, upgrade (cosmetically or marginally) and re-sell properties during the steep price appreciation that existed then. “Fluff and Flip” was the business model of the day, driven by pricing momentum. There was a steep decline in this type of investment activity as the market softened and pricing momentum reversed, wiping out the upside for many who were late to the party.
Today, many market analysts agree that we are at or near a bottom and that the eventual recovery in prices will be slow and easy, as tight credit puts a leash on exuberance. During this period, the market will also need to purge itself of the distressed properties that have driven the continuing decline in prices. These distressed properties (short sales and REO) represent opportunities for investment that aren’t as glamorous as the upward pricing momentum of a few years ago, but instead rely on solid investment principles that provide good returns in any market.
There is still some opportunity in “flipping” in the current market, but it takes a commitment to much more than “fluffing” in order to be successful. Many distressed properties are in poor repair, have been stripped or vandalized or neglected over long periods. The opportunity here is for investors with the ability to cost-effectively identify and remedy these problems with quality repairs/remodels, taking advantage of the “dual market” where the truly trashed properties sell at a significant discount to properties in good repair. The successful investor in this market will analyze the opportunity before acquiring, to determine if the purchase discount is wide enough to allow a profitable turn of the property.
Another investment principle that stands the test of time is investing for income. In this case, long-term cash flow is the criteria, rather than appreciation. Whether the target property is residential (single-family, duplex, fourplex, apartment complex) or commercial, the same basic principles of investment analysis apply.
It is important to analyze the opportunity in terms of return on investment, rate of return, leverage and many other factors, in order to determine if the property meets investment objectives, prior to purchase. Often, a shrewd investor will see opportunities to improve the performance of a target property with changes in the way it is managed, adding to the upside potential of the investment.
For investment success that stands the test of time and is largely independent of market cycles, “analyze and acquire” will outperform “fluff and flip” anytime. The key is taking the time to be sure you are making money on the way in, rather than speculating on making money on the way out. Any appreciation in price is just a bonus in this case.
Spotlight on Nevada County Real Estate – Midyear 2009
- Paul Sieving www.PaulSieving.com
July 2, 2009 – From Boom to Bust and Beyond…
Looking back at the recent market cycle, there’s a lot to talk about. We have heard all the angles and most of us will admit to knowing the story from 2004-2008. From the peak in Q4 2005 to the valley in Q4 2008, median prices in our market have declined 30%, while sales volume has fallen 53%. What’s on our minds today are the mixed signals of the last six months and what is to come.
Looking at Q1 2009 vs. Q4 2008, we note a 20% drop in volume and a 9% drop in median price. This seasonal adjustment is common in all markets for this time of year.
Comparing Q2 2009 to Q1 2009, we also see the normal uptrend in figures, 4% price, and 79% in volume. Down in winter, up in spring, although one might admit this is a large volume increase. The only year in the recent past (04-08) where this normal spring market behavior was broken was in 2008, when volume was up, but price was down. In 2009, price is up again after an anomalous dip for the year-ago period and volume is up in a big way.
What of it? No way of knowing without more information, yet an inflection point is behind us. The only way to truly call the bottom is in hindsight, as an observer.
As participants in the local market, whether buyers, sellers, REALTORS® or observers, we have to ask what we can do as individuals to assist in the recovery. In a word, participate. Be calm, look for the signs, and act in the interest of the market and a sustainable recovery.
The biggest challenge we face in regaining a healthy local market is the increasing number of bank owned properties (REO) coming onto the market. These properties are priced very low and act to drive down prices throughout the market. It’s a two edged sword, as there are some incredible values available, yet too many of them can have an overall negative effect.
As professionals, we know that the best contribution we can make is to work towards getting these REO properties back into private hands as quickly as possible in order to relieve the downward pressure on prices. This is also a boon for buyers who are fortunate enough to be in the market today. The duty of professionals and the opportunity for buyers is in alignment with restoring health to our local market in a way that comes only rarely. Market activity in the last 6 months supports the idea that we are getting it done.
It’s a great time to be in business and we have the opportunity to contribute to the health of our local market and to the financial well-being of our community members.
