Inventory Is Down: Will Prices Rise?

There has been a lot of positive news in the Portland real estate market that suggests that the “bottom” is now in the rear view mirror and that values are poised to rise. For those of us in the trenches, we are struggling to find good homes for our purchasers to buy and in many instances, we are seeing multiple offers on new listings – hallelujah, right? Does this mean we can all “hold” our properties and be up 5 to 10% next year and recapture some of our lost equity?

This is a question many potential sellers are asking us today. It seems that the media is finally providing positive press with an upbeat attitude about the market, and homeowners everywhere are becoming optimistic. However, before we all start making a plan about this exciting news, keep these facts in mind:

1. According to CoreLogic, a Santa Ana, Calif.-based real estate data firm, Portland home prices declined 3% in January compared to January 2011.
2. Clear Capital, another research firm, reported a 2.2% decline in home values when comparing February 2012 vs. February 2011.
3. In the three-month period of December, January, and February, note the following averages in Metro Portland inventory and sales year over year.

If you take a step back to try and determine the true direction of the market, the research firms would have you believing that the market is still in a soft decline. Yet when you look at the shrinking supply of homes and the increased demand, basic economics would suggest we are about to see some real appreciation. Either way, the trend appears to be good, but keep these items in mind:

1. In 2005, when prices rose, buyers were able to purchase their next home before they sold their existing home. This is no longer the case. Very few buyers will be able to purchase before they sell.
2. Many existing homeowners who would like to move up or move down would like to strike now with today’s lower-than-ever interest rates. However, due to the lack of inventory, many are refraining from putting their homes up for sale as they do not believe they will find a home they would like...a “Catch-22”. So the theory goes, if inventory grows a little, it may quickly grow a lot as existing homeowners see future home solutions and consequently place their own homes on the market.
3. How much of the recent increase in sales can be attributed to the fact that, for the first time ever, 30 year fixed interest rates have been available during the past three months between 3.6 and 3.875%?
4. Those homeowners who wait may likely yield a higher price for their home in a few years, but the home they buy will likely have appreciated the same amount, and interest rates will likely be higher.

In the end, we do believe that the market has stabilized and, in fact, that we may even see some appreciation, but nothing close to what we saw during the boom due to the reasons detailed above. The best news, however, is that buyers today no longer need to fear buying a home only to see its value decline after their purchase. And, for those sellers who have continued to pay on their loans with no equity, the next 3-5 years should put you back in a position to sell your home and actually buy your next home with your retrieved equity.