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Have Real Estate Prices Peaked?

Terry Story, Market Peak

With Terry Story, a 30-year veteran with Keller Williams, located in Boca Raton, FL

Steve talked with Terry Story, a 30-year veteran at Keller Williams, about the current state of the larger (macro) real estate market. They discussed prices and how prices affect the market and vice versa. Terry also noted the key factors that help to explain whether the real estate market favors home buyers, home sellers, or both.

Home Sales Are On The Rise

Home sale numbers are on the rise. Month over month, we’re looking at about a 2.5% increase. This figure is based on calculations made by the National Association of Realtors. In the thirty days between June and July, 2019 alone, home sales increased by 2.5%. Essentially, it’s shaking out to about 0.6% year over year.

This is an increase in home sales alone; prices aren’t necessarily climbing with it. Part of this is due to the extremely low-interest rates these days. Last year, December of 2018, there was a marked climb in interest rates. It was a big deal at the time, something that spooked people, and the market saw a huge selloff. In the eight months between then and now, home mortgage rates have come down and are staying down.

The Fed has even begun to lower the rates on short term loans, leaving the prevailing interest rates sitting at 3.5% to 4%. These are some of the lowest rates the market has seen in decades.

The Issue Of Home Inventory

So, the other big issue in the macro real estate market is that of house prices. And inventory has a lot to do with it. Real estate is being scooped up because of better rates, and in a lot of places, this is putting home inventory at nearly record-breaking lows, specifically when it comes to homes in the affordable price range.

Home prices have been rising, about 4.5% year over year. It’s been doing this for 89 consecutive months which is definitely a trend—that doesn’t seem to be weakening. Economically speaking, when it comes to the idea of real estate, in particular, things are looking very healthy.

But it’s important to keep in mind that the real estate market is a local thing. What’s happening in California won’t necessarily affect what’s happening to the market in Florida. In identifying market trends, we have to look at what the trends seem to be over time and be paying attention to national trends, regional trends, and local trends.

Rental Properties And Leases

There definitely seems to be a surplus of rental properties. While many investors are swooping in to scoop these properties up and turning them into condos, many others are choosing to leave them as rental spaces for the monthly income they can generate.

If you are a renter, it’s important to pay close attention to your lease agreement. If the property you live in is sold to a new owner or landlord, they don’t have the right to ask for a new security deposit. The new landlord should inquire of the previous owner as to each tenant’s security deposit, as outlined in the lease agreement. They should ask the previous owner for a signed statement (estoppel) or a copy of the existing lease which spells out what tenants are paying/have paid. When they buy the property, they buy the existing leases.

Still, you should do your part as well, by making sure the new owner/landlord knows you’ve paid the deposit amount. Know that you aren’t required to pay the security fee again. Less than honest landlords may try to recollect such payments or make additions to your lease that essentially let them stick their hands back into your pocket.

How The Real Estate Market Is Defined

There are constant references made to whether the current real estate market is a buyer’s market or a seller’s market. But, what does this actually mean? A market is really defined by how much inventory there is. Realtors use the absorption rate. How many months’ worth of home inventory is there? If there are more than six months of inventory to be sold (usually looking at close to seven months), there’s a high supply, making it a buyer’s market. Less inventory, let’s just say five months or less to be sold, it’s a lower supply, which means it’s a seller’s market. The definition of the market is based on inventory—supply and demand.

But it might be a buyer’s market in one price segment and a seller’s market in another. This is because the inventory of houses, as touched on above, in given price ranges can be (and usually is!) dramatically different.

Currently? In the $1 million and up range, it’s very much a buyer’s market. From $500,000 to $1 million, it’s balanced because there’s right around six months’ worth of houses to sell. But it’s a true seller’s market for homes priced below $500,000.

And that’s our weekly Real Estate Roundup. If you’d like to learn more about buying a home or selling your home, head on over to Keller Williams!

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

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Steve Pomeranz:  It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 30-year veteran with Keller Williams located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story:   Thanks for having me, Steve.

Steve Pomeranz:  Let’s talk about the housing market, the macro market. Are existing sales of homes rising? Are they falling? What’s the trend?

Terry Story:   The trend is they’re going up, Steve, where it’s looking at about a 2.5% month over month, according to the National Association Realtors. And existing home sales climbed 2.5% from June to July. What we’re looking at is about 0.6% year over year.

Steve Pomeranz:  Sales are rising, just not prices. These are sales.

Terry Story:   Right, these are the number of sales. And what’s driving this is the interest rates. The interest rates have been kept low, they had gone up for a little bit and they’ve pressed them down a little bit, which is causing the increase in sales.

Steve Pomeranz:  Last December in 2018, we saw kind of a marked rise in interest rates.

Terry Story:   That’s right.

Steve Pomeranz:  And that really shook everybody up. The stock market had a big sell-off. And since then, interest rates have been coming down and the Fed has actually been raising short-term interest rates, but this time around, for whatever reasons or crystal balls they’re using, they decided to actually lower interest rates a little bit, quarter of 1%. That has led to lower interest rates for mortgage. I think we’re starting to see three and a half to 4%.

Terry Story:   Yep, three and a half percent. And so, basically, what we’re also seeing is a real shortage of affordable housing.

Steve Pomeranz:  Well, that’s the other issue.

Terry Story:   The severe low levels of inventory in the affordable range.

Steve Pomeranz:  Yeah. That affects prices then too, right?

Terry Story:   Sure it does.

Steve Pomeranz:  Yeah. Let’s talk a little bit about prices. I think that we saw that prices were rising year over year, about four and a half percent.

Terry Story:   Right.

Steve Pomeranz:  And that’s been doing that for over 80 consecutive months, 89 consecutive months now.

Terry Story:   And that’s very much a trend.

Steve Pomeranz:  Yeah. It’s still the trend that doesn’t seem to be weakening. This idea maybe of us, we’re going to talk about this a little bit later or maybe another segment, but this idea about falling into recession as far as the real estate, things are still very healthy, aren’t they?

Terry Story:   Things are very healthy. And when we talk about recessions and so on, when we talk about real estate in general, real estate is local. Something happening in California may not have a direct impact on what’s happening to us in Florida. What we’re looking for is over time, what the trend is. There’s a national trend, regional trend, local trend. Real estate is local, so you really have to pay attention to what’s going on in your neighborhood and around you.

Steve Pomeranz:  If you’re living, let’s say we kind of live in South Florida, it’s kind of a retirement, kind of a stable economy, driven by social security payments, by pension plans and pension funds, at least in the area that I live in and work. There’s a lot of high tech and so on and so forth. Unlike, let’s say, a rust belt state where it’s very, very economically sensitive, the real estate would be completely different in a place like that than it would be in a place like South Florida where we are. Okay. Also, one thing that I found very interesting was this idea that it’s possible that some of these new apartments that have been built, everywhere you go, you see a zillion new apartments coming on the market. That they might be converted to condos.

Terry Story:   And they’re not all rented out. I just look at what’s going on in our own backyard. I took someone out to go look at some of these rental complexes and there’s a lot of vacancy.

Steve Pomeranz:  You think?

Terry Story:   You would think, this might be an opportunity.

Steve Pomeranz:  Yeah. Well, housing shortage and oversupply of rental units, that spells condo. Now we did see that. You and I had been doing this long enough that in 04, 05, when things were really hot, a lot of rentals were converting to condos. That was a bad sign.

Terry Story:   Yes, yes, it was.

Steve Pomeranz:  They weren’t really trying to meet the need. They were just really just trying to…

Terry Story:   Survive.

Steve Pomeranz:  Well, they were trying to kind of greedily take advantage.

Terry Story:   Capitalize on the market.

Steve Pomeranz:  The fact that prices were rising. And so they wanted to have people, wanted to have condos so they could participate.

Terry Story:   And a lot of them crashed and burned.

Steve Pomeranz:  I know.

Terry Story:   So sad.

Steve Pomeranz:  I know, but I don’t think that’s the case here.

Terry Story:   No, no, absolutely not.

Steve Pomeranz:  I think there’s over-supply in the rental market and it makes total sense for those to be converted to condos. Okay. Moving on. Here’s the question. We like to quote Gary Singer from the Sun Sentinel and all that. As a matter of fact, I had him as a guest here not too long ago. He’s an attorney, working in real estate area. And here’s a question, can a new landlord slash owner require a new security deposit? You know what I’m saying?

Terry Story:   Oh yeah, I’ve done a lot of these. The answer to that is no. If you are a tenant and you know that your landlord is selling the property, make sure that you bring it to the attention of somebody, that there’s a security deposit out there. When you become the new landlord, you should be inquiring, “Hey, is there a security deposit?” And verify with the tenant so there’s no misunderstanding. But when the new landlord takes over, they’re inheriting that lease and the deposit money should be transferred from the one landlord to the other. The new landlord cannot be asking the tenant for new security.

Steve Pomeranz:  Yeah. The new landlord should ask, should have asked for a signed statement, often called an estoppel and which details the terms of the lease during the purchase process.

Terry Story:   That’s right, they should have asked for at least a copy of the lease and proof what monies were in escrow. That’s something important to learn if you’re out there buying properties that have tenants already in place.

Steve Pomeranz:  Yeah. But as a tenant, I’d be worried that things are going to change. Why would they want another, I have an original lease. You assume the new owner’s going to just assume the lease. And I think that’s the case. And in  the state of Florida, that is the case because if they don’t do it or they start doing some funny business, that’s a very serious violation of rules.

Terry Story:   Absolutely. Yep.

Steve Pomeranz:  Okay. We talk about buyer’s markets, we talk about seller’s markets and so on. I want to know from you, first of all, what? Well no, let me ask the question, what is the definition of a seller’s market?

Terry Story:   The way we define markets, it depends on how much inventory there is. And so we use, we call it the absorption rate, or we’re looking for anything greater than six months of inventory. Generally, we call that a buyer’s market. Anything less than six months, a five, four, below, we call that a, actually, I’ve just reversed that.

Steve Pomeranz:  I thought so. I wasn’t going to say anything until the end.

Terry Story:   Got it backward here. When you’re greater than six months, you’ve got a high supply of inventory. It’s very much a buyer’s market. When it’s the reverse, when there’s less inventory, it’s a seller’s market. Our inventory level’s less than say five months is very much a seller’s market. A balanced market is around that six-month mark.

Steve Pomeranz:  Okay. Yeah. The bottom line is that it has to do with supply and demand. It’s really a simple equation. Simple way to understand this. What kind of a market are we in right now?

Terry Story:   It depends on your price point. I know that’s a vague answer.

Steve Pomeranz:  It’s not the answer I want.

Terry Story:   I know it’s not.

Steve Pomeranz:  A million and up.

Terry Story:   Million and up, we are very much in a buyer’s market.

Steve Pomeranz:  Okay, 500 to a million?

Terry Story:   Balanced.

Steve Pomeranz:  And below 500?

Terry Story:   Seller’s.

Steve Pomeranz:  Seller’s market. Okay.

Terry Story:   In our marketplace here in South Florida.

Steve Pomeranz:  Not only, yes, not only is real estate local and, but within the locality, there’s these dynamics as well.

Terry Story:   Correct.

Steve Pomeranz:  Okay. My guest, as always is Terry Story, a 30-year veteran with Keller Williams, and she can be found ed terrystory.com. Thanks, Terry.

Terry Story:   Thanks for having me, Steve.