Please don’t let me spoil a good cathartic experience for you. If you are certain the sky will fall, then by all means wear a helmet and turn elsewhere for confirmation. I enjoy amateur economics, you know, basic stuff like supply and demand. In my job, we study the real estate market in the Treasure Valleyand have been closely monitoring residential inventory since 2006 after the unfathomable sales year of 2005. At this point, you probably know there is an extreme excess supply of residential lots and, in my opinion, a much more reasonable supply of finished home inventory. I would argue that the market has been correcting itself for some time and we have made considerable progress toward equilibrium.
One way to evaluate the trend of finished residential inventory supply is to study the change in inventory by month from one year to another. Because we live in Idaho, winter both impedes the construction process and the buying process. During the holiday period, people are otherwise focused to think about buying a home and builders know this and try to stage inventory appropriately. The real estate business is seasonal and so viewing year over year data using analysis on a month by month basis is appropriate. Figure 1 measures these variances[i]. In June of 2006, the supply of units began to outpace that of the prior year. The peak of the variance was in September of 2006 with 4,601 more housing units available than in September of 2005. Since then, this variance has steadily decreased to December 2007 where we had 471 more units than the prior year. This trend, derived from fewer home starts and a reasonable level of sales, indicates that the excess finished home inventory is eroding.
Sales trend measurement is one method of gauging the demand for housing. We experienced extraordinary record sales in 2005 that spawned the large inventory in subsequent periods and we may not reach those sales levels for a few more years. However, we can study the change in sales volume numbers for the market to help us understand the direction of the market. Figure 2 is a three-month rolling average of the year over year sales variance measured in number of residential closings
[ii]. In October of 2005 our number of closings began to slow until they fell below the prior years figures in August in 2006. Closings in 2006 were well below the levels of 2005, but 2005 was a fantastically, and unrealistic, robust period. Since June of 2007, we are trending back toward growth. This is in part due to the more realistic comparison to 2006.
We have established that the inventory levels are correcting nicely and the number of closings is trending back toward a more normal level but if you are a buyer, you probably want to know how far prices might fall in this excess supply environment. The parts of the country particularly hard hit by falling prices are where there have been extreme levels of appreciation over the last several periods. The question then becomes how much appreciation did we experience and what has the reversal been since then?
The following table (Figure 3) uses the 3 month rolling average and compares the average home closing price, in both Ada and Canyon Counties
[iii]. It is interesting that both counties’ average sales prices have come back down to the average established in June of 2006. This implies that today you can purchase a home in the Treasure Valley for about what you would have paid 20 months ago. Coincidently that is the time that closings fell to below the prior years 3 month average (see Figure 2). If you look closely at the trend lines in Figure 3, you will see that both the Canyon County and Ada County average closing price attempted to rally back up again last summer. You could argue that there is a ‘floor’ developing, which would imply the average home closing price may very well start up again soon.
One other variable worth studying is the foreclosure rate in the area because foreclosures will add to our already large inventory pool of finished homes. Goodness knows we have been inundated with bad news about the impending catastrophe. Much of that data we see in the media is collected by national entities that collect information on foreclosures and merely count every document filed as a foreclosure. Sometimes property owners salvage the property from foreclosure for a time and then fall back again into foreclosure. The result of this data collection technique is that instead of measuring the number of foreclosures it measures the number of filings. The following chart (Figure 4) was obtained from the Federal Deposit Insurance Corporation (FDIC); it gauges actual property foreclosures in the state of Idaho, not the number of filings
[iv].
This indicates to me that our situation in Idaho is rolling within the range of the last few years and that we are in much better condition than the nation as a whole. The next graph (Figure 5), again supplied by the FDIC demonstrates the delinquency and charge-off rate for Idaho compared with the nation
5. The Idaho rates have been rising but within an historic margin of variance.
If you are a prospective home buyer and you think that foreclosures will add significantly to the supply of inventory I would argue that the likelihood of that is remote. History has shown that national recessions drive people to our productive, beautiful surroundings and quality life style. If you were unemployed and/or tired of bigger city crime, smog and alienation where would you look to live? Perhaps in a city with mountains, clean water and an unemployment rate of less that 3%.
I submit that the fundamentals of our real estate market are correcting and by waiting to purchase you may see the home prices rise. The facts are that the excess supply of finished residential inventory is eroding. Lot inventory notwithstanding, the number of home closings is accelerating and prices appear to be ready to stabilize. When you add to these facts mortgage interest rates in the 6 % range it seems like an excellent time to buy.
Dave Player has been in the banking and commercial finance industry for 30 years. He graduated Magna Cum Laude from the Business School of the University of Utah with a degree in Economics. He is responsible for commercial lending in southern Idaho and Northern Utah, and a Senior Vice President at Mountain West Bank.