Are we there yet?

There is a lot of discussion amongst the real estate community, the banking community, consumers, and the media as to whether or not the real estate market has or will soon hit the bottom. If you think this particular blog post will answer that question, you will be sorely disappointed. However, I hope to potentially shed some light on what is really a very difficult and fluid concept

To that end, I've tried to identify what a non-bubble market would look like in terms of average price points. In our local market, data indicates that our bubble began to manifest itself between 2004 and 2005 (based on historical average sale price increases). So I went about calculating what average prices would have been assuming two different scenarios: one, housing prices matching the consumer price index (CPI) and two, utilizing a slightly higher appreciation rate to account for the differences between an overall CPI measurement versus a measurement based on less liquid durable goods.

There are several prognosticators out there suggesting the market has another 25%, 30%, 40% to drop before we hit bottom. Those "pull them out of a hat" statistics don't really appear to assist us in determining what the market is actually doing. By going through this rudimentary analysis for Davis County, I found some interesting outcomes. If we turn back the clock to 2004 and magically adjust history to eliminate the "housing bubble," we find current average sale prices in Davis County are approximately 16% above what we would've otherwise "expected" to see if housing costs matched identically to the CPI year after year. That said there is significant variation in this calculation based on sub-regions within the county.

Again turning back the clock to 2004 (is this starting to feel like an episode of LOST?) but assuming a slightly higher inflationary impact for housing due to unique housing factors, we see a smaller differential between current actual average sale prices and our projected average prices. This too varies considerably by geographic area. Regardless of which scenario we personally feel is more appropriate, it is interesting to note that just these two scenarios into three geographic areas for Davis County produces a variation range of 6% to 17%. This range is a far cry from the 25% to 40% figures bandied about in cyberspace and elsewhere

I would expect to see even more significant variation if I were to drill down to smaller and smaller geographic areas such as cities, zip codes, or even subdivisions. So although there may be geographic micro-economies where there may be an additional 25% of downward price pressure, it is also highly likely there are micro-economies that have already reached or are near pre-bubble price points. Why is this important?

Because buyers and sellers both need to understand what pricing trends are occurring in their specific location. For a buyer, if you were waiting for an additional 25% drop in a particular area that is already within 5 to 10% of predicted pre-bubble pricing you may likely miss several opportunities to purchase your preferred home based on an unrealistic expectation of further price reductions. As a seller, you may miss potential buyers by placing your property at a level that doesn't acknowledge further price deterioration may occur within your geographic area.

We must also be sure to factor in the traditional supply vs. demand dynamic in this process. If there is a sudden increase in housing inventory levels due to increased foreclosure activity or the so-called phantom or invisible inventory (sellers who have delayed putting their homes on the market due to the downturn but now are at a point where they need to list), that will impact the overall numbers. By the same token, if buyers begin to think the market has bottomed out and move into the market in numbers, it could quickly stabilize housing prices thereby decreasing any remaining downward price pressure

So it would appear the most insightful response to the question "have we hit bottom" is "it depends."