Tracy real estate market update 3/25/08

One of the biggest things I learned in investing is to closely follow the moving averages.

The point when moving averages crossover is an excellent indication of a trend reversal. Specifically, the graph detailing the days on market is stunning in the story it tells. That graph and my business level could be twins as far as I'm concerned. What it says is not only that the numbers of homes on the market for 7 and 90 days both went down, but that the number of homes coming on the market NOW are much more attractively priced than homes that have been on the market for a while.

Whys that? Banks have finally come to terms with the market conditions around here, so the new homes they are putting on the market as REO properties are priced right.

The other thing I think is a factor is that a lot of the newer REO properties are actually in very good condition, so they show well. I think that is mainly a result of the fact these homes were owned by people who really tried to make it, but finally just could not keep up with their payments any longer. In other words, the homes coming on the market now are homes that were owned by quality buyers, so they are in much better condition than the garbage that first hit the market.

These two factors suggest that the older garbage will sit on the market for a while, at least until the fresher, and more well-maintained newer listings dry up. No sign of that in sight, so for Realtors(R) with stale old over-priced listings that they cannot convince the banks are over-priced, I'd look at dumping those listings as fast as possible.

The other item that is a really telling indicator is the price per square foot. It simply is a fact that at raw costs, any house is a good deal. Current raw costs to build a home are about $125 per square foot, under the best of circumstances. Typically, $150 per square foot is a good approximation of what a home is worth in raw cost. Anyone buying a completed home in good shape for $150 per square foot is getting a pretty fair deal, and a well-maintained or well-built home at that price is probably a good deal over the long haul.

In extreme cases the raw value can actually drop below the true value (i.e. if you were to melt a penny, the actual value of the copper is worth more than a penny), but those are very unique circumstances.

Home buyers are looking at either very well-maintained homes, or outstanding values. That seems to be almost exclusively what I am looking at right now. We'll see if the trend continues, the way the days on market graph is aligning, a very big day of reckoning is coming up in the next 30 days. Either the market continues robust activity, or the pulse shows signs of weakening. Time will tell ...

Regards, Jeff