Craig Frazer

Clearly, 2008 is going to be noted as a "transitional" year for any number of reasons relating to economics, politics and international actions. Those of you who know me, understand that I am clearly not as qualified as the talking heads on television and radio to discuss the political and international market issues which developed in 2008 (although that doesn’t stop me from trying).

However, I can provide some insight and overview as to the economic implications for our local real estate market. If you would like to see the actual data reports I reference in this article, follow this link to access both Davis County and Salt Lake County data reports for the fourth quarter 2008. I am an analytical type of person and, as such, tend not to get carried away with the typical "the sky is falling" hyperbole that many fall into. I simply look at the market data (we do operate a quasi-market based economy don’t we?) and see what the market has to say.

In looking at the data for Davis County and more specifically Farmington, it is apparent Farmington held up relatively well compared to Davis County as a whole and, in fact, Davis County did better than the national numbers being reported. Much of this can be attributed to our local economy’s strength relative to the rest of the country. Of course, we have not been immune to the downturn (as you will see in the reports). Overall in Davis County unit sales were down nearly 21% from 2007 (ouch) and down more than 34% from the peak unit sales level reported in 2006.

However, this volume drop off only translated into an average sale price decline of 2.3% for the county. Farmington actually did not see a drop in average sale prices for the full year 2008 (of course it didn't see any increases either). As we look at the quarterly data we do see continued weakness in the housing market. The trend line continued downward in the fourth quarter and many analysts suggest this trend will likely continue into the first and second quarter of 2009. The good news is we are beginning to see inventory levels begin to deplete, either through the closing of transactions as well as sellers (who don't have to sell) removing their properties from the market at this time.

There is data to suggest we may see an increase in inventory levels due to higher foreclosure rates over the course of the next six months. Those projections, however, were done in many cases prior to the Federal Reserve’s recent action to cut interest rates to their lowest level in several decades. This has brought long-term mortgage rates to levels not experienced since the 1950s and 60s. This has helped increase (slightly) demand during the past six months as well as provide an opportunity for struggling homeowners to refinance at more affordable terms. In my last quarterly update I projected a 25% drop in sales activity fourth-quarter 2008 versus 2007 the actual drop was just under 19% (how's that for finding a silver lining in an otherwise dark cloud?). Fourth-quarter residential sales activity in 2008 matches the level last experienced in calendar year 2001 and down 44% from the peak experienced in 2005.

As everyone peers into their crystal balls for 2009, the larger consensus is the US economy should begin to report improvements in economic output by the fourth quarter 2009. If in fact those prognostications are accurate, I expect to see a relatively flat housing market for the next 12 months. This does present opportunities for certain participants in the housing market. In particular, first-time home buyers as well as move-up buyers have an opportunity to acquire their preferred housing option at a much more affordable price point. This should continue so long as the Federal Reserve is not required to adjust interest rates due to potential inflationary signals (not likely given current economic sluggishness).

Overall a tough but not catastrophic 2008 and a forecasted sluggish 2009. In spite of all the talk and reports, people are still buying and selling homes.

As I’ve worked with buyers over the last six months of the current economic “crisis,” I am regularly asked if the market has reached “bottom?” My response is generally in the form of an observation, that you don't know the bottom of any market (whether it be the real estate market, the stock market, or a commodities market) until prices begin to trend upward. Then you can look back with confidence and say “Oh, that was the bottom.”

Now of course there are, depending on who you talk to, some potential leading indicators as to where market begins to shift. In the real estate market many agents will use certain data points such as days on market, aggregate inventory levels, and to a lesser extent stabilizing sale price points to ascertain a market shift. I confess to using all of these and other data elements when trying to evaluate market conditions for my clients.

Just this week a client (We have been looking at properties for the last 45 to 60 days) asked the question “has the market bottomed?” With all sincerity, I gave the profound response of “don't know, the statistical indicators are conflicting.” In my particular market we are seeing increasing days on market (although a portion of this is likely due to seasonality) however we are seeing a stabilization in inventory levels and a stabilization in price points. However, although inventory levels are stabilizing, the makeup of the inventory is changing dramatically toward a heavy influence of short sale and foreclosure properties. Does this mean the market has bottomed? Can't say yet, however, it does appear we are seeing more realistic price points for listings than what we saw 6 to 8 months ago.

Based on this conversation, I put together a small spreadsheet for this client to illustrate the financial impact of waiting to purchase. The intent was to simply highlight the differences in out-of-pocket cost for my client based on a potential further deterioration in home price points counterbalanced by potential changes in financing costs. Here's a snapshot of the spreadsheet for reference.

My client’s purchase price point combined with his down payment capability would result in a mortgage near the $300,000 level. What I did with the spreadsheet was to calculate his monthly P&I payment based on various interest rates (at the time I did the spreadsheet 4.5% rates were being quoted). I then made the assumption that if the market were to deteriorate further from our best possible negotiated price point we would be able to reduce his loan cost by an additional $10,000 (use any number you see fit).

I then calculated the P&I (Principal & Interest) amounts for this new price point. For purposes of illustration for my client I made several assumptions that underlying loan costs beyond interest rate would not be impacted, that his creditworthiness would remain unchanged, the mortgage market would not seize up again, and the same property would still be available at a lower price point without additional buyer competition. Of course, assuming interest rates remain unchanged, it is always to the advantage of the buyer to purchase at a lower price. This analysis assumed that if the market in fact had reached bottom and the market and overall economy were improving there could be a corresponding upward adjustment to interest rates (as the Federal Reserve would attempt to control inflationary tendencies as our economy strengthened).

As seen in the illustration, interest rate increases of 0.5% or less have very little financial relative to the savings and should not be a detriment to attempting to get the lower price point. Of course the same cannot be said should not be able to achieve the lower price point (someone else buys the home while you wait) and interest rates increase in the interim. However interest-rate adjustments of 1% or more have sufficient impact to warrant consideration with respect to purchase price decisions. In my particular client illustration, an interest rate increase from 4.5% to 5.5% increased my clients projected annual mortgage payment by just over $1,500. This means that from a purely cash flow perspective, after seven years it would have been cheaper to pay the extra cost in the purchase price rather than wait for the “bottom” but incur higher financing costs.

Now, it would be possible to make this a much more complex analysis based on points, other closing costs, seller concessions, pro-rations and other data elements. However, I believe the net result will be similar. What this relatively straightforward analysis does indicate is that attempting to squeeze out an additional $1,000, $2,000, $5,000 may not be cost-effective if during the course of negotiations interest rates adjust (unless you have a long lock period for your rate).

For my client specifically this analysis was useful as his holding area for the upcoming purchase is likely to be in excess of 10 to 15 years. For someone who is looking to purchase and will likely move in under five years this analysis suggests it would be a wash to purchase now or wait. Keep in mind this is not a static assessment and will change over the coming months as we either experience improving economic indicators or stagnation continues as unemployment increases and economic output does not report signs of growth. As with everything, one must constantly re-evaluate their assumptions as to market conditions.

Who would’ve thought since my last market update we would have seen the complete meltdown of the American economic system? OK, perhaps a slight overstatement but when Alan Greenspan uses the term “credit tsunami” it certainly perks people’s interest. Overall, as you’ve read, heard and seen, the housing market throughout the United States has hit some rough water. Not only are inventory levels up but the credit markets have tightened to the point of choking off a good deal of the buyer demand. The good news is the Utah market, to date, is handling the crisis a bit better than many parts of the country.

As you will see in the attached reports, although we have been impacted by current economic events, the devastation we see in some isolated markets around the country has not yet reached our communities. That said, there are certainly market segments within our area which have been severely impacted. In particular the luxury home market (homes priced over $750,000 here in the valley) has really slowed with nearly six years of inventory sitting unsold as I type this. The market with the least impact to date is the under $250,000 segment. We continue to see a reasonable balance in that market segment between buyers and sellers.

In Davis County as a whole, you can see the slowdown in the following table and graphs:

Given the continued decline in the stock market and the slight increases in the jobless rate, along with the general uncertainty in the economy right now, every indication is the fourth quarter of 2008 will be one of the slower quarters, in terms of home sales, in recent memory. Now, that said, the fourth quarter is traditionally the slowest quarter in any given calendar year, so a good portion of the slowing will be due to normal seasonality. I would expect home sale activity in the fourth quarter of 2008 to be approximately 25-30% less than the activity we experienced in the fourth quarter of 2007.

Closer to home (literally) here is a quick summary of activity for Farmington (as well as the corresponding Davis County information for comparison:

In spite of the unit sale slowdown mentioned earlier, average sale prices are holding up well with prices at the levels reported during the same period in 2007 for Davis County. Farmington specifically is reporting a slight overall increase in average price points, however pricing pressure is building in the market currently and fourth quarter sale prices may bring that average down to zero or slightly negative. Median sale prices have also held up well consider the slowdown in unit sales. When comparing Davis County to various other parts of the country (and other areas of Utah), Davis County is holding up relatively well.

It is easier to see the trend lines when looking at quarterly, year over year data:

In spite of all the negative market indicators currently, the data does reflect a silver lining for a certain segment of the market. The data confirms a continuation of the healthy buyer’s market which began to take shape in the first half of 2007. So, buyers in this market are able to see price points approaching those experienced in 2004 & 2005. This presents a good opportunity for either first time home buyers or for “move up” buyers as the affordability index has improved over the past 12 months. In addition, it is anticipated the credit markets should begin to loosen as the “bailout” packages (both in the United States and Europe) begin to show some traction.

With the opening of Legacy Highway this past week, the travel drama that has been I-15 rush hour has been transformed into a much more pleasant and time saving activity for Davis County residents. However, we shouldn't lose perspective on the impact FrontRunner commuter rail will have on our communities in both Davis and Weber Counties.

The addition of Legacy Parkway to our overall transit system is helpful but at the same time limited. Why? Because building roads/highways by their nature, are not scalable. In other words, they are difficult to expand (or contract) as needs changes in the future. In Davis County, in particular, we have a unique geographic situation as we are literally between a rock and a wet space. As such, our available transportation corridors are limited (unless we want to plow down a lot of homes and businesses. Thus expanding roadway space is becoming increasingly difficult if not impossible.

That said, there is one way in which I-15 (or any other highway for that matter) could have been made a tad bit more scalable (and perhaps eliminated the need for Legacy Highway altogether: rather than building dedicated northbound & southbound lanes, they could have been constructed as universal lanes with movable dividers.

http://en.wikipedia.org/wiki/Reversible_lane

This would allow for "demand based" volume adjustments to be made. So if we took the current eight lanes (four northbound, four south bound) of freeway on I-15 throughout much of Davis County and simply constructed an eight lane universal road, you could have the ability to have say, six lanes running southbound in the morning, shift to a four and four configuration for the late morning and early afternnon, and then switch to a six-lane northbound configuration for the evening rush hour.

However, since this option wasn't used during the major I-15 renovation 8-9 years ago (all that work for the Olympics), we now have Legacy highway to provide the addtional lane capacity so desperately needed in Davis County.

Going forward, adding lanes to either I-15 or Legacy will be nearly impossible. So step in FrontRunner. As population increases push transit demand higher, commuter rail provides us that scalabilty. With rail transit, all you need to do to increase capacity is to add a car or two or ten (all of the expensive infrastructure such as track, right of way acquisition, stations, etc are already in place). This is a much reduced cost rather than having to build one or two lanes of traffic for a 10 - 50 mile stretch (just as a reference the 14-mile length of Legacy Highway had a price tag of approximately $700,000,000). In addition, this capacity adjustment can be made in an almost immediate timeframe to allow increased volume for special events or if there is a major disruption to either of the highway arteries.

Davis County is now much better prepared to handle future growth as a result of the multi-modal approach they followed relative to upcoming transit needs. As a homeowner, this can also assist our property values in the future as we will have access to mutliple transportation options. To understand this impact, one only needs to look at those "transit based" communities in places such as Connecticut, New York, New Jersey, the Bay Area and the like to see the positive impact transit options have on property values.