Raleigh Real Estate Guide

Anticipations for the Raleigh Housing Market in 2012

First, Inventory is down nearly 25% over the past year.  This is the first time in 5 years we have had a drop in inventory.  Even more significant, this is the lowest inventory since our peak in 2006.  Resales are down near 25%.  New construction is down near 20%–now down 60% from the market peak

Areas of far oversupply dropped from 50% to 33%–so less areas have far too many for sale signs up in their neighborhoods. Yet, this leaves 1/3 of our market needing a sizable price adjustment.  Unfortunately, luxury homes are still in an oversupply.  So we still expect prices to drop here as the abundance of sellers fight against each other to attract the lower amount of shoppers. 

Overall, 2011 inventories were at a 6 month supply which was a step better than 2010 at a 7 month supply.  3 or less is a sellers market, 8 or higher is a buyers market, 5 or 6 is pretty stable.  Right now, some areas like North Raleigh under 250k and Wake Forest under 150k are a seller’s market.  Meanwhile, NE Raleigh over 150k is a buyer’s market

So we anticipate seeing firming or slightly rising prices in the more demanded locations and more progress toward stability in sliding areas.

Second, Demand is steady overall.  The First part of our year was quite slow as we struggled through the recovery from disappearing tax credit incentives.  But we had quite a lift in the final part of the year.  Homes going under contract increased 16% during the fourth quarter  and 30% so far this year—compared with the overly sluggish tax credit recovery a year ago.  So this anticipates a stronger year.

At the same time, this pickup in demand is primarily focused on central  areas and homes priced near and below the average home price; 250k and below.  At the least, with the low prices and rates, people are trying to move as close to work and their favorite locations as possible.  Possibly more, there appears to be a general migration from outlying areas to central locations close to the job epicenters.  For example, buyers are often choosing N Raleigh over E Raleigh; Cary over Holly Springs; Wake Forest over Youngsville

Overall, we anticipate the strongest market since our peak in the most central locations near or below the average priced home

Third, there are a few wildcard issues to watch.

First, we expect rates to stay low for most of this election year.  But a Big swing up may cause buyers to hesitate and cut back demand.

Second, where will rent rates go?  Although rates and prices are down, rents at apartments increased 10% over past year, this should continue to be a great motivation for many to buy a house and lock the payment

Third, after repairing the foreclosure process, big banks rumor that they are now about ready to move forward on those delayed foreclosures.  Our current foreclosure rate is near 10% of the market.  If we have a big increase, they could compete more with ordinary resales; provoking sellers to drop prices

Fourth, our workforce and unemployment rate is pretty stable (not moving more than 1%).  A big change in jobs would quickly impact demand for housing. 

Finally, buyers are still pretty fragile with their high expectations.  They are vulnerable to little changes and rumors here and there.  So expect the unexpected.

What is a better value, buy or rent?

We can measure the value of buying against the value of renting by the scale of Affordability.  It considers three issues: purchase prices, rental prices, and loan rates.  Affordability is a great way to combine all these issues into a simple formula.  The National Association of Realtors Housing Affordability Index rose above 180 this Summer which is near its record high in data going back to 1970. The index’s historic average is about 120.  That means: house payments are more affordable than they have been in decades.

First, prices are low.  High inventories have caused prices to drift down.  U.S. house prices have plunged by nearly a third since 2006.  And Raleigh prices have fallen about 10%–most between 5-15%

Second, mortgage rates are at a 40 year low, near 4%.

Third, rents are on the rise.  At the peak of the market, we had an all time high % of homeowners—a sign of coming imbalance.  Since then, we have had the largest decrease in home ownership % since Great Depression (according to the NAR reporting of Census data).  Four million unfortunate foreclosures have turned into renters.  Many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.  That poured gasoline our rent demand.  Hotpads reports that rents nationwide jumped 11.6% in 2010, to $1,320 a month.  As a result, in most cities in the US and in many cases here in Raleigh, the payment is less to own than to rent. 

An Example: 3532 Singleleaf can be purchased with a 5% down conventional loan that yields total payments near $1100.  Meanwhile, market rent is near $1250-1300 a month.  Buying this home saves near $150/ month.

The New Standard for a House that will Sell for a Strong Price

 When you sell a house, there are a few things you cannot change—the location and floorplan.  You can enhance them, but you really cannot change them. 

Also, the seller cannot change the market conditions—the number of motivated buyers out there shopping or the number of homes on the market; in other words, supply and demand.  The market demand is fixed; it is out of the seller’s control.

 But the seller can do something about the condition of their home.  They can control how they present their home to buyers.  They have a product to sell—and they choose, ‘do I put it on the highlighted isle-display at Macy’s or stuff it into a mish-mashed pile in the back corner?’  In our boom market, anything you put out on the floor sold.  But we are a long way from that kind of market or that kind of growth in our national economy. 

So here is my idea on the new standard for a house that will sell for a strong price in our slow growth markets.  You have to catch the eye of the buyer and convince them your house is their most appealing opportunity.

First, ensure it is in solid condition.  Make it repair ready so the buyer is confident they are buying a solid house that is a safe investment.  The vast majority of buyers prioritize ‘move in ready.’  They will spend more money if they are not concerned about their risk. 

Second, add irresistible improvements.  Be creative without spending much.  Add the touches that are most attractive and desired by the buyers that will look at your home—all on a cost effective and limited budged.  But be careful here so you don’t overbuild it—don’t way overdue your neighbors or your competition.  Make sure you get quality advice before picking your projects. 

Third, attractively present your home. 

• Make it organized so people can see the best qualities of your home.
• Make it clean so you put a shine on all your valuable features.
• Set it up and stage it so you enhance your home’s ideal uses.  Spotlight its virtues.    
• And then advertise it on the internet with a glow—use pictures that make people want to see the house for themselves. 
• In your advertisements, tell people the story of the house—how it is a distinct home that offers distinctive virtues and opportunities. 

Finally, price it right.  Make it competitive.  Send the message to the buyer that this house is for sale and they need to buy it now.  Currently, a home priced right sells at 98% of original list price.  Those with price drops sold at 83% of original list price, on average.  Spare yourself trouble and try to price it competitively in the beginning. 

For more information and some great links with concrete ideas and pictures, see our ‘seller guide’

Here is my basic answer: those most inflated by the bubble still need more correction. And the primary sign for falling values is high inventory. To catch the eye of the few buyers ready to make a commitment, homes have to dress themselves up and offer lower prices

Let me highlight three kinds of housing affected by the bubble whose values will likely deflate more. These include: Particular price ranges, particular locations, and particular kinds of properties

First, The bubble inflated some price ranges way beyond normal demand. As the bubble deflates, people are making more conservative choices and this leaves the upper price ranges with high inventories that sit relatively stagnant.

1. In Cary: this affects homes over 500k
2. In N Raleigh, Apex/ Holy Springs: over 350k
3. In Wake Forest: over 250k
4. In Raleigh, Knightdale and Garner: over 200k
5. These upper price ranges will still have to drop prices to clear out inventories.

Second, The bubble motivated a wave of growth outside the city which far outpaced normal growth. As the bubble deflates, it leaves an over abundance of homes on the edges of town.

1. To the North: this affects parts of Wake Forest and beyond
2. To the East: this affects NE Raleigh, Knightdale and Zebulon
3. To the South: this affects South Garner and Fuquay Varina

Third, The bubble excited demand among some properties that are not nearly as attractive now.

During a bubble in demand, people overlook reasonable defects. They may overlook Functional problems—like difficult floorplans, steep driveways, tiny yards, or backing to major roads. They may overlook repair problems—like worn out flooring, rotten siding, or old wiring. So homes with reasonable deficiencies may need further prices drops.

Also, during a bubble in demand, people pay high prices from builders in popular neighborhoods. People rush to buy before the builder raises the price again. This is especially true in large neighborhoods with similar homes. But, after the project finished and our bubble busted, several homes compete for one sale. The one that paid 240k has to drastically cut their price to compete with the person that bought for 200k and were willing to sell for 210k

This is a painful problem in most towns. According to TARR. Areas in Briar Creek and Mingo Creek in Knightdale are down 13% this past year. Bowling Green in WF is down 7%. Stone Ridge in NE Raleigh is down 6%. Bedford in N Raleigh and Cameron Pond in Cary are down 5 %. And if prices are dropping like that, they are not done. So neighborhoods with high inventories and similar homes may continue to slash their prices

Finally, When demand is high and people easily sell their homes for strong prices, they don’t go into foreclosure. But when prices drop, decent quality foreclosures go up. Although Resales may not need to match foreclosure prices, increasing foreclosures in NE, E, and SE Raleigh are likely to erode prices for those that have to compete to attract the same buyers.

Many of the kinds of troubled housing I have mentioned have already seen deep cuts. But, if inventories are still high, they still need further cuts. My advice for those in trouble: do the best you can, learn some good lessons, and move forward. Fortunately, wisdom is more valuable than money.

To address to that issue, I want to ask 3 questions and respond with information primarily from the TARR report, prepared by local authority Anfindsen.

Q 1: Are house prices still falling?

The Two most widely used Raleigh house indexes report values fell near 2% in 2010—so will that trend continue in 2011? Supply is the best forecaster for future prices. (Supply is defined as the amount of homes for sale compared to the amount of those closing. It asks, ‘if no more homes came on the market, how long would it take for all homes to be purchased?’) An Under supply is 3 months or less; the lower the supply, the more prices rise; few houses for sale suggests rising prices. An Oversupply is 10 months or more; higher the supply, the more prices need to fall. Too many houses for sale suggests falling prices.

Cary: oversupply above 600k; bad oversupply above 800k
North Raleigh: oversupply above 400k; bad over supply above 600k
Wake Forest: oversupply above 200k; bad over supply above 400k
Raleigh: oversupply above 150k

Q 2: Did we have a bubble that needed to be corrected and have we had a full correction yet?

Although Raleigh has historically been a slow growth market without big spikes and deep drops, we had a bubble market inflated with artificial demand. During 2003-2007, the number of sales inflated beyond our historic trend. Following the peak in 2007, as a correction, prices have fallen since 2008. By now, sales are almost 50% of 2007. Consequently, this slide caused depreciation for most of those who purchased since 2006—the underside of the bubble

But our bubble has deflated, and we sit close to our historic norms. This is a big claim—so let me give a few reasons. First, too many houses were created in the bubble. When demand cut back, many sat vacant. Builders slowed way down; our new construction inventory cut in ½ since 2007. Using the number of permits pulled each year to measure the amount of building, Anfindsen shows we are currently in an over correction from our 11 year trend levels. Without surprise, when our population increases, we will demand more houses. Don’t forget, the Triangle is an important area for jobs, according to the census, the Raleigh area Grew 41% from 2000-2010.

In response to the over correction, new construction has already started a rebound—our market is starting to demand more houses. Last year, areas in hot demand nearly doubled and areas with a bad flood of properties sitting stale were nearly cut in half. Technically, we can say there are Less areas of oversupply; more areas of undersupply. With anticipation for our population growth, last month, Builder magazine ranked Raleigh the #1 healthiest market—projecting that we will pull 90% more permits for new building. All this points to an increase in demand for homes and a climb after the fall of the bubble

Second, during the bubble years, Andfindsen shows, people were purchasing above their wages. But now we have seen a correction so that current prices are in line with wages on the historical trend levels. Again, it is time to climb after the fall of the bubble.

Third, according to Lawrence Yun, chief economist for National Association of Realtors, during the bubble years, near 70% of the national population were home owners. Currently, near 65% of the population are home owners, which is near the historic norm. Again, the bubble seems to have fallen back to historic averages.

Q 3: Do current purchase prices need to continue to drop to be a good value?

Nationally, Yun claims that affordability has not been higher in decades—that means that the average priced house costs much less based on current prices and rates. Rates are low; held below what rates should be in healthy markets. Prices are low; hme prices below what it would take to rebuild the houses= over correction. In fact, Trulia reports that it is cheaper to own than rent in 72% of nationwide metros. And that is true of many of our houses around Raleigh. The bottom does not need to go deeper and many homes do not need cheaper prices

My Conclusion about the bottom of the Raleigh market: 2009 handed us our biggest adjustment. Prime areas hit their bottom in 2010. At this point, we are not expecting market wide catastrophic slides. Yet some areas and price ranges still need further correction.

According to Hunter Muse with Ameriprise, a few general economic factors are likely to affect our local Raleigh housing market that serve as evidences that 2011 should be a good year to buy a home.

First, interest rates are relatively low but the FED is likely to raise those at some point in future, maybe 2012. 

Second, banks are now making money.  With past due loans on the decrease, they are likely to start lightening up their strict standards and release more money.   If so, that may increase buyer demand and lead to increasing house prices.

Third, consumers have been paying down their debt so that debt levels are relatively low.  As they feel comfortable taking on more debt, this should increase demand.

Here in January, what should we anticipate for the year? 

A big issue is inventory.  Over the past 4 years, the new construction inventory has dropped each year BUT the resale inventory continues to climb.  Unfortunately, this anticipates price decreases in most parts ofWakeCounty. 

 Overall, 2010 marked the fourth year in a row of sliding sales—and this might be our biggest concern.  We want to see sales increase to see stabilizing or rising prices.  

 Here are some initial suggested strategies:

• Buyers: focus on established and popular areas.  Even though their values are pretty stable based on stable demand, you should still see some motivated sellers that offer remarkable values—which will more than overcompensate for slight dropping values.  And interest rates are great.
• Sellers: Know your competition and price the home right up front.  Know your condition and your value.  Sell it before you need to make deep price cuts.