Tuesday, September 20, 2005

Outside Factors Determine Leveling Market

Which way is the market headed? And what directs which way it will turn, up or down? These are questions real estate professionals hear on a consistent basis -- especially in light of unprecedented market appreciation across the country.

Currently, the average sales price of a home in the U.S. stands at $219,000 (14 percent more than the same period as last year, according to the National Association of Realtors). So everyone, from the hotdog stand operator to the corner CEO is concerned about what's going to happen.

Frankly, I'm counting on historical growth, national population growth, and the regular cycles of business to take care of any angst I might feel about the market. Nevertheless, there are various factors that effect any real estate market and you'll find all of them at work when the market is moving upward or downward.

Supply and Demand

The first, of course, is supply and demand. If there aren't enough houses to meet the demand, generally, your prices are going to increase, homes are going to sell in a record pace and every Tom, Dick and Harry is going to get a real estate license. In our local market in the Washington, D.C. area, we are seeing an amazing amount of job growth. In the last five years, more than 287,000 jobs have been added to this region's economy -- nearly 100,000 more jobs than the second highest location (Miami), according to George Mason University's Center for Regional Analysis.

Here's the downside, while the region has averaged job growth of 60,000 jobs each year the last 20 years, we've only put up an average of 35,500 houses each year (again, GMU's Center of Regional Analysis numbers). The lack of local plans to allow enough construction of more affordable housing structures has created a housing deficit of which forecasters see no end. In a world of smart growth, local jurisdictions better listen to their Economic Development Authorities in determining development plans, not no-growth advocates who are not anchored in economic reality.

Interest Rates

Though many homebuyers desire prices to drop, this may not always mean lower payments. Again, in the DC market area, a summer leveling off of prices would seemingly provide potential homebuyers with a break on housing affordability -- not so fast.

For instance, in Arlington, the first Virginia suburb outside of Washington, D.C., the median housing price has dipped $20,000 (from $520,000 to $500,000) through the summer, according to the local MLS statistics. Sounds great -- but the interest rates have increased by a quarter point as well, from 5.25 percent to 5.5 percent. Assuming a 20 percent down payment for either mortgage -- the $520,000 purchase with a 5.25 percent interest rate (June's average) would have cost $2,297.17 (principal and interest) per month; while the $500,000 purchase with a 5.5 percent interest rate (August average) will run $2,271.16. The $20,000 price drop saves the buyer a whopping $26.01 per month because of the increased interest expense.

Vacations & Weather

This past Independence Day nearly 13 percent of the DC population left town -- that was 600,000 people, according to AAA. Keeping in mind that at any given time about 7 to 10 percent of home dwellers are looking to move, that means that if the averages held, the Washington area lost anywhere from 42,000 to 60,000 buyers for a week during that holiday season. When buyers leave town, that naturally creates a slowing in the market.

In talking with the Director of Public Affairs at the Mid-Atlantic AAA, John Townsend, his feeling is that we have fewer residents in town this summer than in previous summers. They're finally leaving for vacation and that means fewer buyers in town to purchase, longer times on the market and dropping in prices (though minuscule) until the buying herd returns.

Also, weather can play a large part in what happens in the market. Particularly, weather that shuts down a region, such as a hurricane or snow storm, can reduce the number of buyers flowing through open houses and checking out inventory.

When looking at the effects on real estate, as you can see, it's not always the market. Sometimes it just means everyone's gone to Disney World.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

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