At a recent conference, Brad Inman said that he was thinking about buying two more houses. I wanted to stand up and say, “Don’t do it – the next downturn is on the way!” Yes, there are multiple signs the next downturn is around the corner, but what if you could predict whether a specific property in a given market area would increase or decrease in price during the next year?
Ever since I listed my house in September and lowered the listing price after just two weeks, my gut has been telling me the next downturn is just around the corner. My sense is that we are in 2006 all over again. Prices may still be increasing, but have already flattened in many areas, a precursor to the next downturn. As I speak with real estate professionals across the country, about 80 percent of them are feeling the same vibe. Yes, there are pockets where the market is still roaring, but that’s not the case in most areas.
What The Experts Say
Bernice Ross
In a recent Inman article, Alex Villacorta, chief economist, Clear Capital, observed that “Many markets are already hospitable for buyers, but we have yet to see the demand. This implies that consumer confidence and the inability to overcome the barriers to purchase are a real headwind to a fully engaged housing market, especially for first-time homebuyers.”
Jonathan Smoke, chief economist for Realtor.com, identified a major contributor to the problem as being the burdensome level of rents in 85 percent of the markets that keep households from saving towards a down payment.
Douglas Duncan, Fannie Mae’s chief economist, cites lack of income growth for low and moderate income households as being the real problem.
Lou Barnes, my favorite prognosticator of rates and mortgage conditions, explained how negative interest rates in Japan and Europe (i.e., the banks charging you for leaving your money on deposit with them), can pave the way for a deflationary cycle.
In deflationary cycles, prices decline while the value of the money in your wallet actually increases, the exact opposite of an inflationary cycle, where your cash loses value as prices increase. In other words, why buy anything when the cost of it is going to continue to fall?
Barnes went on to say that even though things look good in terms of U.S. interest rates and demand, there’s no inflation or wage growth.
A New Prediction Tool
WeissAnalytics.com, the brainchild of Allan Weiss, co-creator of the S&P/Case-Shiller index, is the first tool that provides over a decade of pricing data for 50 million individual properties in 38 different states based upon 300 million sales. (At this time, data is not yet available for non-disclosure states or low population areas.)
What’s really exciting about this tool is that it also predicts how prices will change during the next year not only in major metros and ZIP codes, but for individual properties. It’s this combination of prediction linked to specific properties that differentiates this tool from RPR and other market reports. See chart top right for an example of how this works.
The two homes charted above are a few blocks from each other and are located in the 07461 ZIP code. The gold line represents historical values of 27 Pochuck Drive, a 960-square-foot home built in 1960. Over the last year it appreciated 9 percent and is forecast to appreciate another 5 percent in 2016.
The blue line represents the historical values for 25 Cedar Lane, a 854-square-foot home built in 1930. Over the last year it depreciated by 2 percent and is forecast to stay steady during 2016.
Assuming that these two homes were of equal value at the beginning of 2015, by the end of 2015, there was an 11 percent difference in their value. The Weiss forecast calls for a 16 percent difference in value by the end of 2016. Based upon the projected appreciation, the Pochuck Drive property would be the best property to purchase.
Weiss Analytics also provides over a decade of history in an easy-to-understand heat map format.
So Should Brad Buy?
Assuming Brad is considering purchasing in either New York City or in West Hollywood, which area would offer the best appreciation? The heat maps for the New York Metro area and for West Hollywood are viewable as videos at bit.ly/1RXHLcq and bit.ly/1N59mRf, respectively.
To make the best decision possible, Brad would have to compare specific properties as to their predicted appreciation or depreciation. While New York City has many areas where prices are appreciating, it looks as if the green areas representing appreciation in West Hollywood are starting to disappear with shades of red just peaking through. In other words, the prices in West Hollywood may have already peaked and could be showing signs of a potential downturn.
So the question facing Brad is this: “Do I invest now, knowing my dollar may be worth more in my wallet than in a property, or do I search for a property that will outperform the market where I want to be an owner?”
Being able to better quantify not only the history of a property, the ZIP code and overall area coupled with where the market is heading in terms of specific properties, opens the door to better pricing models for agents and better decisions for both buyers and sellers.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author. Email: Bernice@RealEstateCoach.com
