Market Watch - Thomas Randall -15 November 2016
I had to have one of the most difficult discussions a Realtor can have with his seller client last week. The conversation about reducing the price of their home and the discussion about the market leveling off and potentially dropping soon. I knew a turn in Dallas real estate was coming, but no seller wants to hear it. Some of the telltale signs were the emails at the end of September and the beginning of October from builders offering 5% commission if one of our buyers purchased their new builds. Normally it is 3%, or 4% if they are getting desperate.
You can see that builders are just now accepting the news that the market has topped off and there is nowhere to go except for a flat line. It is apparent that last summer was the best market we had seen in a long, long time. For the past 6 months the excuse was, "The election is causing everyone to wait on their home purchase." And that is certainly the truth. No one wants to purchase or sell around one of the most influential elections of the century. Everyone has subconsciously associated the last new president taking office with this election. Remember what happened in 2008.
The Texas Association of Realtors released its statewide Quarterly Housing Report, which stated there is a "cool off" from the 5-year boom. If you watch any of the "Million Dollar Listings" shows you will hear the same complaint. There is too much new construction and with too much supply, the prices drop. This oversupply is only true for high-end, new construction builds but this is a microcosm of a macrocosm. This is the beginning of a slow down.
Luxury sales in Manhattan have dropped 16% in the last year. Take a look at these high-end markets and you will realize they are a great sample of what is going on with the entire real estate market. I am not saying the market is going to tank in the next month, or even the next year, but home prices in Dallas are certainly not going up 9% in 2017 like they have in the past few years.
In Dallas, we watch the high-end market because it is concentrated, limited and easier to evaluate. It always falls first before the rest of the market because it is so limited. There is only a finite number of these homes on the market and it is easy to see when they are being reduced, and not selling. While it may sound like a damning premonition, it is not.
The real estate market, ideally, moves slowly. The home you purchased last year for $500,000 will not be worth $300,000 in 6 months. It will simply not appreciate at 5%+ over the next 2-3 years. It will most likely stay at that value or even drop 1-3% in value for a couple years then drastically go up in value at 7%+ for a few years following the correction/crash (whatever you want to call it).
If you are familiar with real estate, you know winter is the worst time to sell a home. For my sake, and the sake of my fellow Realtors, I hope this is the cause of our slow down. But realistically, a buyer's market is looming and sellers are scrambling to offload their real estate before the buyer's market becomes a reality.
In this business it is imperative that we have down times and high times. I have dealt with frustrated buyers and ecstatic sellers for years now and it is about time the playing field was leveled.
Conservative, long-term investors have been sidelined for years because capitalization rates were 5% or even less. Capitalization rate is the ratio of net operating income to property asset value. In other words, it is your profit over the year if you are a landlord. Investors want a 5-12% cap rate depending on the potential increase in asset value.
It has been impossible to stomach the $1 million apartment complex that only brings in $30,000 after all expenses are paid. And yet, this is what is available in the current market. Buyers are starting to put their foot down because they are no longer worried about 6 other offers flying in. Once the prices correct slightly, another massive influx of money will flow into the real estate market since there is still high demand.
It is very important to remember if you purchased a home in the last year or so, you are not done for. The trick to any real estate is to buy a desired home in a desired neighborhood and to hold it. If you plan to sell in the next 2-3 years, you may take a small loss but if you hold onto it for 5-7 years, you will potentially see your investment go up significantly.
This article is based on the fact that I have my finger on the pulse of the market. The Dallas real estate market has slowed, it has not died, and any Realtor who is actively working will tell you the same thing.