Residential Market Watch: Midyear residential report card shows progress - Denny Grimes and Company: MarketWatch Update

Jul
20

Residential Market Watch: Midyear residential report card shows progress

Inventory must fall for further recovery

Back in the dark ages when I was in elementary school, the letter grades on our report cards were S, N and U. The "S" stood for satisfactory, the "N" for needs improvement and the "U" was the dreaded unsatisfactory grade. Someone reminded me that the same grading system also included the letter "E," which stood for excellent. That troubled me because I didn't remember seeing an "E" on my report card, so I tore the attic apart until I found the shoebox that contained a few of my old report cards. Sure enough, the legend on the back of the card showed that the coveted "E" was the highest grade available. I then opened my report card and realized why I didn't remember seeing one. My report card may have been void of Es, but our market has racked up a bunch of them this decade. Most recently however, our Es stand for excruciating, exhausting and economically challenging. Although our market may not be getting straight Es like it used to, eventually it will because good grades follow disciplined behavior. Our marks will improve in direct relation to the discipline sellers exercise with their expectations and their asking price. Sellers are finally accepting the reality of the market, which means we will eventually work our way out of academic detention. The health of a market can be measured in many ways. For this midyear report I have selected three indicators and graded each on their performance so far this year. The indicators are as follows:

• Existing Home Sales: Grade S+ If our market needed a shot in the arm, we got the equivalent of a booster shot because the first six months of 2008 yielded almost the same number of home sales that were posted for all of 2007. According to the local MLS, 5,400 homes went pending in the first two quarters this year as compared with 5,290 for the entire year last year. We couldn't have scripted a better six months. Some agents, acting like a modern day Paul Revere on his midnight ride, have been riding around shouting "the buyers are coming." But this awesome turnaround in sales was not caused because homebuyers decided to return to our market. Buyers never left. We can thank sellers for the market's revival because an increasing number of them finally threw away their 2005 wall calendar and the unrealistic expectations that went along with it. The sales pace usually slows in the second half of the year, but even after adjusting for seasonality, we are on pace to sell more than 9,000 homes this year. That would be a 60 percent improvement over last year and would mirror the level of business we experienced in 2002.

• Existing Condo/Villa Sales: Grade N This market's grade last year was "U," so the "N" grade is an improvement. Through June 30 of this year there were 1,819 condo sales, which is a pace that would exceed last year's numbers by 20 percent. This is progress, but more improvement is needed because, as good as a 20 percent increase sounds, we still have more than 8,000 condos for sale, which equates to a 50-month supply. Oversupply is not the only hurdle that stands in the way of a full recovery for the condo market. The rising costs of taxes and insurance have increased monthly maintenance fees to a point where second-home buyers now consider renting instead of buying or, worse yet, find a less expensive place to winter. The condo market used to be an affordable alternative for the primary home buyer because condos were cheaper. That is no longer the case, because the oversupply of bank-owned homes has driven home prices down to a point where condos no longer have the cost advantage. Therefore, don't expect this market to graduate soon. In fact, it will be held back a year or two.

• Existing Home Inventory: Grade U If existing inventory were fat cells, our market would be in a circus side show tent supporting a sign that read "World's Fattest Market." Lee County still has more than 15,000 existing homes for sale. The increased sales pace has not made a dent in the number of homes that are for sale. Ironically, this month marks the third anniversary of the market's peak because July 2005 was the month where inventory was the lowest. Do you feel like celebrating? Excess inventory, like fat, puts pressure on your heart and is counterproductive to long-term health. (See http://www.marketwatchupdate.com/lee-county-inventory-single-family-home-update)

The heart of our local economy is new construction and as long as homes are being sold below the cost to replace them, our economy will suffer. Home prices will not rise until our inventory level deserves the grade of "E," which in this case stands for equilibrium. Therefore, the sooner we reach equilibrium, the sooner our economy recovers.

My teacher would always handwrite a few notes for my parents at the bottom of the report card. My notes on Lee County's report card would be as follows: "Lee's performance last year worried me, but he is doing much better this year. He still has a tendency to daydream a bit, as if he is living in the past. Lee is one of the most gifted children in the class and a bright future is in store for him, if he stays disciplined and focused on the task in front of him. There are still some tough assignments ahead, but I have every confidence that Lee will succeed if he will keep the faith."

Denny Grimes President Denny Grimes and Company, Inc.

http://www.dennygrimes.com

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