What is the Next Tipping Point for Real Estate

What is the Next Tipping Point in Real Estate?

A few years ago Malcolm Gladwell wrote a book called The Tipping Point. Gladwell likens the tipping point to an epidemic, making the point that social epidemics take on a life of their own. The recent real estate bubble bursting indicates a tipping point, or more to the point, two tipping points — the point where speculation ran epidemic-like through the market; and the tipping point when sub-prime adjustable rate mortgages started coming due and burst the bubble, starting the epidemic we are experiencing now.

The question addressed in this article is when is the next tipping point in real estate. To illustrate, I’m going to use the Daytona Beach real estate market because of my familiarity with that market. I am a real estate agent in Daytona Beach.

Going back to 1998, less than 300 homes and condos were sold on average in a month. The median price was $86,000.

Then we saw the following growth:

Year

# Homes Sold

Median Price

1999

3796

$86,000

2000

3671

$91,000

2001

4035

$100,000

2002

4739

$117,000

2003

5610

$134,000

2004

5985

$165,000

2005

6141

$217,500

2006

3813

$223,000

2007

3044

$200,000

The First Tipping Point

2001 shows the beginning of the increase in properties sold and prices, but it’s still not very dramatic. Then over the next two years, we see the median sales price rise by 34% and properties sold rise by 39%. There is price pressure and demand pressure pushing up both sales and prices. We believe the tipping point was when increases in properties available could not keep up with demand making for scarcity and driving prices up by 62% from 2003 to 2005, while units sold increased by only 9%.

The Daytona Beach market was representative of many markets around the country. A combination of factor combined to cause a speculative frenzy resulting in epidemic behavior by millions of people. The combination of easy money, increasing prices, and the belief that it would go on created a tipping point.

The Second Tipping Point

Then in 2006, the bubble burst and the market tipped the other way. While the damage and the causes are still being determined, most people believe that the primary cause that created the second tipping point was the inability of enough people to make mortgage payments. Money was being loaned to people who could not afford the payments. Worse, many of the loans were adjustable rate mortgages that increased significantly after the initial “teaser” period. While this was a contributing factor, we believe it was one of several causes and its contribution is more to the severity of the crash than the primary cause.

What was the primary cause? Without seeming overly simplistic, the underlying values of the properties could not support the prices and when enough people realized this, they stopped buying. In other words, we reached the natural conclusion to a typical cycle. Prices go up and then they go down. This market was fueled by allowing people who could not afford homes to play in the game. So prices were pushed up too fast for the underlying economics.

The Next Tipping Point?

If you pay attention to local and national media, you can see that we are still in the middle of the epidemic. We are still working our way through mess. We believe that in our market we have seen the worse in terms of home and condo sales, but we can’t be sure about prices. Median prices continue to fall, but 85% of Daytona Beach home sales this month have been at less than $300,000. So we don’t know if prices are falling or people are buying only lower priced homes.

In our area, this makes sense. Salaries and wages in Daytona Beach support sales in the lower end of the price spectrum. 62% of sales this month have been below $200,000. We believe that this will be the next tipping point. Owner occupied homes that are easily supported by the salary and wage base of the local area will be the hottest market and eventually supply will become limited. People are not as optimistic and will buy homes at more conservative prices. If you want to know the next hot market in your area, look at the average annual family income and calculate using about 28% of gross income for home payments. So a family income of $70,000 will support monthly payments of $1,633 per month, including taxes and insurance. Depending on the cost of taxes and local property taxes we are looking at about a $200,000 home with 10% down.

What to Watch

We would recommend looking at a range of 20% to either side of your calculated home value based on your local demographics. In a market where the annual family income supports $200,000 as the average sale, we would target homes from $160,000 to $240,000 as the next hot market. This will vary widely depending on where you live, but should provide basic guidance. Daytona Beach Homes are certainly playing out that way currently. Note use the average or mean income, not the median income. Median is always lower.

We believe the next tipping point will be based on common sense and some frugality. Too many people are suffering to forget fast. Look for people to become more conservative in their buying behavior. There are many people who are looking for signals that it’s safe to buy. When they do buy, they will be more careful and conservative. That’s what’s happening in the to real estate in Daytona Beach and in many other locations in the country.

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