Causes Pinpointed For Housing Market Shifts

April 7, 2008
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GRAND RAPIDS — According to Case-Schiller, the national average of home prices fell 9 percent in December. The Office of Federal Housing Enterprise Oversight reported the change is “essentially flat.”

“You could ask yourself the question who’s right, but I think the better question is, does it really matter?” said Jamie Starner, immediate past-president of the Grand Rapids Association of Realtors and broker and owner of Starner Realty.

Starner argues that when assessing the real estate market, it is best to do it on a local level.

“Looking at the national real estate reports is a lot like looking at our weather. Real estate is uniquely local and our weather is uniquely local. You wouldn’t have wanted to get dressed this morning based on the average precipitation or the average temperature,” he said. “What is relevant is what’s happening in our local market.”

In a recent presentation to the Press Club of Grand Rapids, Starner noted the local market has some bright spots. He reported that sales were up by 30.7 percent year-to-date and, if foreclosures are taken out of the equation, the average dollar volume is up 19 percent, bringing the average home price to about $184,000. Including foreclosures, however, the year-to-date dollar volume is down 20 percent, making the average price just over $123,000. While year-to-date foreclosures and pre-foreclosures account for 11-12 percent of the listing inventory, foreclosures account for 50 percent of all homes sold and 33 percent of the dollar volume.

The “bigger picture” is the imbalance of supply and demand. Starner explained that foreclosures add to the imbalance by creating low-price competition for regular sellers. Also, normally, when people sell their home, they do it to buy a better home, which creates a “domino” effect. Since foreclosure properties are vacant, this effect does not occur.

In real estate, a “balance” between buyers and sellers is when there is six months worth of standing inventory. Standing inventory represents the rate at which houses sell. Starner said currently there is about 10.5 months worth of standing inventory, compared to the national average of 10.3. In Kent County, the rate is slowly decreasing.

Another ingredient to the imbalance is the unemployment rate. Michigan is at 7.2 percent, but Kent County is at 5.8 percent; 5 percent is considered full employment. Starner feels that while unemployment is an undeniable factor, the bigger contributor to the slow-moving market is lack of consumer confidence, which keeps people from buying and selling.

“Lack of consumer confidence will hold people out of the market, and this, in turn, reduces demand, and the supply and demand becomes further out of balance,” said Starner. “Those who remain in the market will act more conservatively; they’ll offer less on houses, they’ll spend less on houses, they’ll take more time shopping for the best bargain — and therefore prices are held down.”

For many markets across the nation, prices had been inflated in a “speculative boom,” causing a sizeable gap between housing prices and the average income, which is used to determine the affordability of a market.

“People were getting priced out of the market,” said Starner.

The closer that housing prices and average income move in parallel with each other, the more affordable a city is, which leads to stability, Starner explained. Grand Rapids was ranked fifth in the nation in most affordable places to live by the national level of the Home Builders Association and Wells Fargo Bank.

Michigan, however, ranked sixth for highest foreclosures by RealtyTrac, a Web site that monitors foreclosures nationwide. Starner sees this as both troublesome and hopeful. While a foreclosed home represents the struggle of someone losing their home, gains are made when buyers find good deals that will put them ahead in the long run.

Starner said he doesn’t know if Michigan has turned the corner in the housing market, but believes the state has turned “a” corner. Because Kent County has kept such a close parallel between average income and housing cost, he suspects the area will see a quick catch-up of market value when the market accelerates again.

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