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MARKET COMMENTARY


MARKET CONDITION


Housing inventory tends to shrink during winter as sellers wait until spring to list their houses and buyers disappear in the fall and wait until mid January to start their home search. Sellers tend to re-enter the market as winter fades away. That has not been the case so far. Buyers are out in full force, but sellers are nowhere to be found. This has exacerbated the shortage of listings and fueled a feeding frenzy for those listings that are on the market in the 100k - 200k price range. Those houses commonly sell within days, and in some cases, hours. The 300k - 500k market is evenly balanced and possibly tilted a little towards the buy side as you move towards the upper end of the range. The 500k+ range is solidly a buyers market. There is a glut of those houses. They have shown little appreciation over the last few years and in some cases they have depreciated.

Interest rates are creeping up as the Federal Reserve has begun a concerted effort to raise interest rates 25 basis points at a time. Rates are still very low by historical standards, but any increase in interest rates raises the cost of owning a home and that puts pressure on pricing.


LOOKING AHEAD

Due to the low inventory levels in the entry level properties and the huge demand, we have seen prices rise nicely since the 2012 bottom. I suspect that is going to moderate this year. The demand will remain high, but it will be hard for pricing to rise much. There are signs that we may be approaching a top in the market. Here is why:

SELLING TIP

The improvement in the economy over the last few years has brought back that old euphoria that pushed housing prices to unsustainable levels twelve years ago. The buyers most adversely affected by the recession seem to have lost their fear of housing and are aggressively buying. But, as discussed above, this phenomena is not likely to continue much longer as the market matures. There is no reason to believe that the demand will be satisfied this year or possibly the next, but it will come to an end. It is not healthy for markets to be out of balance and they always move to their equilibrium point. If you are thinking of selling, you may want to put your house on the market sooner rather than later.

A very important factor in pricing is property condition. The more attractive a property looks, the more it will sell for. While it is understandable that sellers hesitate to put money into a property that they are going to sell, just imagine how the buyer feels about having to take money out of pocket (assuming they have it) and put it into their new house. If they have to spend money, they will discount the house accordingly. In most cases buyers greatly overestimate the cost of the repair. Our Selling Tips page in the Sellers section of the site has great tips for improving the appearance of your house without spending a lot of money.

At this time it makes sense to price the house at the upper end of fair value to take advantage of the inventory shortage, but don't price it as if it were a rare commodity. Buyers are still price conscious. Once the inventory shortage is eliminated, so will the pricing advantage.

BUYING TIP

Housing remains a good value and interest rates are very low from a historical perspective. The upper end houses reflect very good values relative to replacement cost. Eventually, as the economy improves, they can be expected to rise with inflation, as housing has throughout most of history. Rates are low, but rising. Pricing on entry level housing is somewhat extended, but still a better value than renting. Low mortgage rates help keep payments low. As rates rise, buyers will have to settle for less house to stay within their budgets. Rates will probably never be this low again. Waiting could be expensive.

Sellers typically don't get all their money back for improvements when they sell, which means the buyer is getting the upgrades and updates at a discount. Also, look at the financial cost by comparing the added monthly cost of buying a house that is move in ready versus the opportunity cost on the out of pocket money you spend for repairing a cheaper house. For instance, at 4.375% on a 30-year mortgage every thousand more you spend for the house costs you about $5.00 more on your monthly payment. If you save $10,000 on the price, how much can you repair for $50 a month? Carefully weighing all the factors will help you make the best financial decision. By the way, don't put much stock in the fixer upper and flipping shows that are popular on HGTV. They make great viewing, but have little basis in reality. Most of those that are successful at it do it professionally.

To read a discussion on the 2005 - 2010 housing decline please click here.


  March 18, 2017

Written by Mike Salkin, Berkshire Real Estate market analyst.

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