Went to the A La Mode Appraisal Software convention in Las Vegas this past weekend. It was a great experience as I got to meet appraisers from all over the country and hear about conditions in their areas.
I spoke to an appraiser from Denver who stated that 3 out of every 8 recent sales are in foreclosure. I know this sounds extreme, but I heard similar tales about other previously hot locales. Several folks from Las Vegas said that they heard of situations where some California home owners had sold their dwellings and bought 2 in Las Vegas hoping to cash in by taking what is now seen as a dangerous gamble. Homes in formally red hot Las Vegas are staying on the market way too long and prices are plummeting.
Much of this apparent bubble was caused by speculation, with these buyers essentially creating a false shortage by removing available housing product from the market. By taking this economic gamble and tightening the supply of available housing, some prices rose to unprecedented heights. Although this has been devastating to many average folks caught up in it, much of the pain being felt now is by those who helped create the problem.
Some feel that this is similar to the Internet/Technology bubble, but this analogy is somewhat flawed. Back then we saw I/T companies with price/earnings ratios in the hundreds and many ostensibly great new companies with no inherent value at all. But real estate is different, it has REAL value. Though in many places that value has gotten out of step with reality.
We in Baltimore are somewhat better off than in many other parts of the country. Our most severe drops in value have occurred in areas that experienced the greatest appreciation. These properties are primarily situated in the communities surrounding the Inner Harbor. Many other more reasonably priced dwellings in decent neighborhoods are still seeing modest appreciation. Since most of these other parts of the city have seen decent but not spectacular increases in value, they have also been spared the extreme gyrations of the market. Consequently, our foreclosures are running at “only” about 5%.
A few weeks ago, new housing sales figures came out indicating that nationally sales were up 16%, but prices were down 11%. This shows that the large builders understand the law of supply and demand. They know that to clear out unsold inventory, prices must moderate.
When owners of previously owned housing realize that they too must give up some of their gains, in many instances 60%-100% , the log jam in existing housing sales will break and the market gradually recover. When these owners accept the reality that they must accept less then their neighbors got a year ago, perhaps they will eventually find comfort in their net gains. The incredible appreciation they have realized is really not that hard to live with.