Sales Down, Prices Up is Spreading

Here are some headlines and article titles I pulled up today in my feed reader:

Desert housing market: Sales dip, but prices rise in July

Low inventory driving Wisconsin home prices up

Home prices go up in Mass. in July, while sales were down

Tight inventories push Coulee home prices up

I could have probably found a dozen more easily.  The evidence is clearly telling us that home prices are rising, but this is accompanied by low inventories.  Supply and demand tells us that rising demand will lift prices, but that’s not what we’re seeing in many markets.  Instead we’re seeing low inventories creating competition among buyers, and this lifts prices.

Why the low inventories?  Plenty of reasons can be found, each of them probably contributing to the situation:

• Baby boomers staying in their homes instead of selling; often because they can’t find anything of value to buy in replacement.

• Parents with college age kids and even graduates staying at home due to student debt, lack of down payments and generally just a lack of desire to own a home.
• A lot of homes, though they have finally come out of underwater status after the crash, are still not showing enough equity to get their owners eager to sell.
• General uneasy feelings about jobs and the economy. People tend to want to maintain rather than make changes in their lives.

Whatever the reasons, there just isn’t a rush of sellers into the housing market.  As long as this low inventory situation exists, any buying pressure at all will tend to lift prices.  The question now may be “what will draw sellers back into the picture and what will happen to prices if they do return?”

The very best situation would be that sellers will gradually come back, helping to keep supply and demand from getting out of whack the other direction.  However, if the news of rising prices keeps dominating the headlines, a sudden return to more normal inventories could drag down prices, maybe a lot and very quickly.

I’m not one of those “bubble theorists.”  It’s just one possibility.  Suppose prices do take a hit; what about real estate investors?  As we saw in the crash that began in 2006, it will depend on their investment niche and on leverage. 

The Flipper

The real estate flipper could have homes in various stages of the deal process.  The wholesaler who does no rehab is working the shortest timeline, and probably will be able to move their deals through to closing with little or no damage to their financial position.

The fix & flip investor will have a problem on homes that still have significant time left before the work is done and the sale closes.  Even if they have a buyer contracted, the buyer could decide to let their earnest money go if the value of the home has dropped a lot before the deal is finished.

When it comes to leverage, things can get really ugly.  The aggressive wholesaler or fix & flip investor may have multiple deals moving and get really smashed by sudden price declines.  This is part of the game, risk versus reward tells us that the higher and fast profits of flipping will carry added risk.

The Rental Investor

I would expect rental investors to come out of our example situation pretty well.  They aren’t wanting to sell, so a temporary drop in value really doesn’t get them excited.  They do carry some risk however.  If the price declines last long enough and bring down rents as well, then the leveraged rental investor could have a problem.

If rents drop enough to create a negative cash flow, a lot of rental investors will have a big problem.  However, it’s unlikely to be the case if they’ve used leverage wisely and haven’t overloaded their inventory with low cash flow rentals.

We’ll all just keep doing what works, but doing it with due diligence.

For more visit: https://www.huffingtonpost.com/dean-graziosi/sales-down-prices-up-is-s_b_11678882.html