On today’s show we’re talking about how to make sense of confusing market trends. These days there is no shortage of contradictory data.
I’m continually reminded that real estate is hyper-local. The news media reports the averages, the macro trends across the nation, across a continent, and even globally. Somehow the news media is attempting to connect the dots and warn you that a slower growth in manufacturing in China will translate into a loss of jobs in your home town, or that a higher price of oil will mean fewer home sales in
Some local real estate markets are bucking the trends. It is completely possible to have cities that are at different stages in the cycle.
In Silicon Valley, we’ve seen inventory of homes on the market increase 132% in a very short time period. The main factor is that the number of buyers entering the market in silicon valley seem to have vanished. There simply aren’t as many buyers.
We’re seeing the same in Dallas, Seattle, Portland. We’re seeing dramatically higher inventory and homes are taking a lot longer to sell. Prices have levelled off and are either flat or slightly down in many major US cities.
In my home city of Ottawa Canada, we’re seeing the opposite. Inventories have dropped to the lowest level I can remember. We have just over 2 months of inventory on the market for both single family homes and condominiums. I can remember just two years ago when we had 10 months of inventory in the condo market.
In some areas of the city, the inventory is even lower. The number of days on market has fallen by 24% for single family homes and by 48% for condos.
Prices increased 7.7% year over year and inventory is down 25%. When I talk with friends who are brokers, they speak about how difficult it is for a buyer agent to close a deal under $500,000. There are multiple offers and homes often sell above asking price. Some buyer agents are getting burnt out. Some agents are worried about the traditional uptick in market volume in the spring. The current market inventory is at 2.2 months. But when you consider the traditional increase in sales during the Spring, we can expect an even more acute shortage.
So when a market diverges from the norm, there can be two explanations.
- The market is truly a market unto itself and is not influenced that much by outside forces.
- The market follows the macro market trends but is merely delayed. Some secondary markets attract investment when the primary markets get overheated.
We often see a lag between a hot submarket and a neighbouring submarket. Buyers say, well, if I can’t afford to live here, why don’t I look another 5 minutes down the road.
If I can’t afford to live in NY, why don’t I look at New Jersey, or Philadelphia. If I can’t afford to live in Palo Alto, why don’t I look in Freemont.
Some cities like Ottawa and Washington DC as capital cities tend to live in an economic bubble. So much of the local economy is dominated by government spending that they’re somewhat insulated from broader market forces. In the last downturn in the wake of the 2008 financial crisis, real estate prices in Washington DC only fell 19% from the top of the market in 2007 to the bottom of the market in July 2010 before rebounding by 14% in only a few months later that year.
By comparison, prices in Phoenix Arizona fell by 67% in the last downturn and took almost a decade to rebound to prior levels. So please folks, stop listening to the macro housing data and using that infer meaning to your real estate decisions.
Real Estate is hyper local. Prices changes are highly linked to mobility of people. If people don’t move very much, prices don’t change much. If people move in or out of the market easily, you can expect prices to move a lot.