John J. Adams
Adams, Cameron & Co. Realtors
Introduction and History
Real Estate is an investment. Whether purchasing for a primary residence, income property, or banking on price appreciation, the end goal is to come away with a positive return. A particular investor may have a variety of reasons for investing and the value associated with the return can vary. For example, when purchasing for a primary residence or for a second home, the return may be partly or entirely intangible. The enjoyment that an owner has in their residence is vital.
Intangibles aside we would like to see a dollar return from any property purchase. Over the last several years it has been difficult to see that positive return as prices have eroded across the country. Basic economics says that price is a factor of supply and demand in the marketplace. Of course, the number of buyers determines demand and the quantity of sellers determines supply. Sellers come in several categories today, including: new home builders, resales, bank owned properties, and short sales. During the first half of the last decade we saw the number of buyers drastically outnumber sellers.
On the demand side of the equation, low interest rates coupled with very easy access to capital pushed demand to new heights. Almost anyone interested in a property could essentially finance 100% (in some cases more) of the value of the property often with no money down and little proof that they could afford the payments. On the supply side, home builders were struggling to increase their available homes by buying undeveloped land and building frantically. Resales were available as people moved into new homes. Bank owned properties and short sales were almost unheard of as most property was valued well above what was owed. Because of the high demand and low supply prices rose dramatically.
In the second half of the last decade the prices plummeted as supply completely outstripped demand. The obvious issues with the easy access to capital became obvious as owners who had bought more property than they could support began to default on their loans. The industry was slow to react and the number of new units continued to increase as in process inventory was completed without sales of new homes. At the same time resales increased as confidence in the market eroded and, lastly, the the number of bank owned properties began to rise as owners lost their properties. Ultimately, in hindsight, the problem was likely only avoidable if more action had been taken as values were increasing.
I’ve heard that, how does that help me?
More information has probably been written about the housing bubble and subsequent burst than about the great depression. Everyone is aware of the challenges and impacts. How does this help to find the best deal?
Investment in real estate requires the buyer to speculate as to the future of the market. Essentially, “will property values go up or down?” The best way to determine what is happening in the market, though, is not through a study of property values. Instead, it is by examining the supply and demand which determine property values. Supply is a difficult question to address.
Examining the market in Volusia and Flagler Counties (which includes Daytona Beach, Deltona, Palm Coast, and many other cities), the number of new homes being built has clearly declined dramatically over the past several years. In addition, the number of houses available on the market has declined from over 20,000 to fewer than 15,000. That calculation is determined based on the number of properties listed among the four local multiple listing services (Daytona Beach Area, New Smyrna Area, West Volusia, and Flagler County). That reduction is greater than 25% of the supply. However, there are a few tricks to measuring supply. First, there are some people who are willing to sell only at exorbitant prices. These sellers are not really in the market but due to the nature of the real estate brokerage business they are included in the inventory numbers. Second, there is concern about the number of foreclosures that are in the process. These properties will likely be entering the market at some point in the future and are often called “shadow inventory.”
Demand is much easier to determine. In a market with such rich supply it is easy to gauge the recent historic demand by looking at closings. The number of closings can help us to determine how many people are entering the market. Recent demand has finally hit bottom in the last few years and has begun to rebound.
This chart shows the number of closings each year according to the Volusia County property appraiser. It clearly shows an increase in 2010 over the previous two years. While it is not yet back to the highs that we had seen in previous years, it is a marked improvement.
Examining the supply and demand can help to forecast the change in price moving forward. With an increase in demand and a decrease in supply, price is very likely to begin moving upward. Over the last few years prices have begun to slow their decline and level out. During 2010, in fact, the prices were relatively flat on average. In addition, the properties that have been most aggressively priced seem to be coming out of the market all together.
When trying to find the best deal possible, this is the type of data that needs to be examined in order to best determine the quality of the investment. This data should be leveraged with your other reasons for purchasing property in order to determine the value of the return.
The data suggests, at least in this part of Florida, there is an opportunity to begin seeing an improvement in price and the time is ripe for investment.