What's Up With the Down Market?
HONOLULU ADVERTISER June 21, 2009
BY LISA SCONTRAS
Custom Publishing Group
If you're a true-blue real estate junkie who flips straight to the business page to read the latest housing statistics, then the most recent batch of market indicators may have left you wondering where we are in this economic cycle.
Island foreclosures are up, but still lower than most other states in the country. And unlike the severely overbuilt communities in Las Vegas or South Florida, our supply is limited. Inventory here is actually down from January, but so are the median prices overall. So what do all these seemingly conflicting statistics say about future trends and what data is critical to making wise real estate choices?
When local economists were asked to share their insight on understanding market conditions, they offered this advice on which were the most important statistics to keep an eye on and what it all means.
SALES VOLUME
Comparing anything today to figures produced during the five-year housing boom is going to look dismal and sales volume is no exception. In order to get a true perspective, you need to also step back and examine the historic trends of the market — pre-boom.
May data gathered at the Honolulu Board of Realtors revealed the pace of single-family home and condo sales combined on Oahu well behind figures from the market peak in August of 2005 — dropping from 1,286 sales then to 488 last month. Put in perspective however, February of 1995 sales were nearly half that — at 240. So what does all that mean to Joe and Jane homebuyer?
Michael Sklarz, president of Collateral Analytics, compares the current sales volume of roughly 2,000 sales a year to the previous three real estate cycles — going back to 1977. By charting sales volume historically for more than three decades, he shows it is one of the leading indicators of where prices are going — that when the number of sales picks up, prices are soon to follow.
Looking at the percentage change of median sales price each year together on the same chart (above) with the number of sales, you can see sales volume indeed has a direct effect on sales prices down the road. Sklarz believes we are at, or at least very near to, a low point in this real estate cycle.
"The biggest decline in this cycle has probably already occurred," Sklarz says, referring to drops in volume levels and prices. "This chart suggests we are near the bottom. It (volume and in turn, prices) may go a little lower, but probably not much."
MONTHS OF REMAINING INVENTORY (MRI)
When analyzing inventory levels, Sklarz applies the same logic. Months of Remaining Inventory (MRI) is a market indicator that combines supply and demand into one statistic by dividing inventory (supply) by the monthly sales (demand). Historical data shows that it also is a leading indicator of what direction prices are heading.
"MRI is counter cyclical, so it will be high in a weak market and low in a strong market," says Sklarz. "The average (since 1977) whole year figure is around 10 months and that's where we are now — at around 10 months — which suggests we're kind of at a neutral point. It probably won't go much higher."
Paul Brewbaker, economist and principal at TZ Economics, adds that today's MRI of approximately 10 months has been rising slowly since 2005-06.
"When sales volume declines, inventory starts to pile up," says Brewbaker. "But don't forget that in the 1990s, during the last real estate cycle, we saw 22 months of inventory remaining."
Brewbaker recalls that one of the problems that led to the dramatic increase in inventory levels here 13 years ago — selling here to buy something cheaper on the Mainland — is less of a risk today.
"What happens when the California home prices dropped lower than Oahu, people started dumping their properties here and buying there," says Brewbaker. "Buy low, sell high. If median prices in San Diego are down to $400,000 and you can sell your home on Oahu for $500,000 ... it's tempting.
"Fortunately, in this current cycle, unemployment here is only around 5 percent and it's close to 15 percent there, so the economic situation will probably prevent people from wanting to do that," he says. "You still have an opportunity to get a job here or start a business. People here want to stay.