Real estate has maintained a prominent position in the news media during recent times and currently the reports are characteristically depicting downward trends and bubbles bursting. Many factors demand attention when determining true market direction. The prime lending rate is one major factor influencing whether money is spent and even how the money is spent. When the national average shows a decline in home sales and prices will this hold true for all areas? Or are some areas impervious to the pressures applied in an attempt to control inflation?
David Fisher depicts a nonconforming area in a nationally released article, one seeming to refuse to follow the economic trend even to the point of maintaining gains over previous years. The article definitely shows a slowing of new building in the area but does not show a downward trend in prices. According to Mr. Fisher, "Bend led the nation in median home price gains during the first half of the year" (2006). Inventory is building and even with the record setting months the market does show signs of slipping. With a glut of homes hitting the market the supply is greater than demand at this time. The article, written in August 2006 indicates an inventory level of 8.65 months in the largest city, Bend. Various local professionals view the changes as originating from differing sources. Anna Marie Colluci, a local broker interviewed by Mr. Fisher believes the investors are panicking and placing recent purchases on the market in an attempt to beat the sliding prices. Optimistic professionals maintain an opinion that the flow of buyers from other areas will continue into the resort region maintaining an adequate demand. Property owners selling in California and other neighboring states can still buy view property at desirable prices and the quality of living is a bonus.
Rising interest rates have decreased investor interest in real property. Along with the interest changes developers remodeling entrepreneurs have inundated the market with new product in an attempt to keep up with demand. The developers and planners failed to stay abreast of emerging trends or just ignored the signs of change. The supply increase occurred as a result of new structures and investment properties being exposed to the market in an effort to achieve the highest possible sale price before the purported bubble bursts. The glut of houses was backed by fear or panic and not financial planning. With an apparent mounting supply as competition, truly motivated sellers will begin to offer concessions, price reductions and realtor incentives in an attempt to beat the competition. Demand began falling as buyers watched the market begin to build in the spring and coupling this with rumors of rising interest rates lends caution to the equation. The wait and see stance played a large role in perpetuating the ever increasing supply. Home prices, although still well above the previous year show signs of sliding. The median home price in bend as of August 2006 is 37% above August 2005 showing a marked increase in price although the number of sales was down. With mounting supply as competition the truly motivated sellers will offer concessions, price reductions and realtor incentives in an attempt to beat the competition.
The market is a system of give and take with price being the rationing factor in the equation. In the case of the housing market the coordination was not effectively solved resulting in an overage of supply and low levels of demand. Using historical statistics and accurately determining who is demanding and why would have headed off the resulting glut. The builders and developers believed the supply of buyers was greater than existed and in retrospect may have slowed production after realizing the demand was artificial. Essentially let the market normalize and the market will begin to thrive.
As interest rates rise there appears to be a corresponding reduction of investors in the local market. Although the article shows a strong month in comparison to national averages the mounting supply will inevitably take a toll on the market. In addition to interest rates the lack of solving the coordination problems helped the mounting problem build more rapidly. Planning from a statistical perspective will decrease the likelihood of over supply in the future. Understanding the economy and measures taken to control inflation as well as what drives supply and demand is a key to responsible business. Real estate may not remain the focus of the media but will continue to hold a place in the health of the economy.
Fisher, D., (2006) Home prices soar in Central Oregon ahead of expected seasonal slowdown. Knight Ridder Tribune Business News, Washington.
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