The Lag

Posted on Thursday, June 28th, 2012 at 6:19am.

Today's post was contributed by guest blogger and fellow Realtor Rick Jarvis of Rick's article discusses the importance of buying now before home prices begin to climb again. We are recovering as we speak…or at least we will in about another 18-36 months. Most online sources define ‘Fair Market Value’ as something that sounds a whole lot like this – when a willing buyer and a willing seller, neither of which is under undue pressure, agree to a price at which they will exchange a good or a service. In real estate, that is only partially correct. The large majority of homes purchased in the US are purchased with some level of debt.  The use of debt usually means a mortgage and mortgages require appraisals.  Anyone who has gotten a mortgage knows that the standard appraisal (Uniform Residential Appraisal Report) takes 3 ‘applicable’ properties that have recently SOLD and uses them to establish a market value.  The issue is that SOLD implies past tense. The Case-Shiller Index, widely accepted as the gospel on housing values, recently came out with a report showing that housing values are back on the rise, albeit slightly, in almost every measured metropolitan market.  One of the reasons they noted was the sharp decline in inventory.  While absorption has remained relatively constant post-crash, inventory levels have been declining.  We have now reached a point where the demand for housing (at least QUALITY housing) has increased above the level availability.  When that happens, prices should increase. The central issue is no longer whether or not the market is improving (it is) but at what rate it will be allowed to increase as long as appraisers are required to look to the past to establish market conditions in the present.  Viewed differently, banks that lend the needed capital to builders and developers for land development and new home construction, are required by Federal bank examiners to have the assets appraised prior to lending.  With a backward looking appraisal as the guide, decisions are too often made NOT to lend despite the clear market demand.  Much like driving a car by looking in the rear view mirror, establishing values using historic data will not lead to optimal results. Think of this: it takes about 6-9 months to build a house.  It takes about 12-24 months from the time a piece of land is put under contract until it is zoned and developed.  With appraisals looking backwards up to 6 months for comparable sales, you can begin to see that market balance is going to lag for quite some time. While there still may be some excess lots yet to be absorbed, if lot pricing is any indicator, the excess inventory is all but absorbed and I even heard a builder use the word ‘shortage’ the other day.  It had been a while since I had heard ‘shortage’ and ‘lots’ used in the same sentence. The bottom line is that we have too many restrictive practices at all levels of the process (appraisal, building, lending and zoning) to ever have a market that is in absolute equilibrium so use it to your advantage.  The lag that these factors create mean pricing is about to head up more sharply than one would expect and buying now will likely be one of the best financial decisions made in many buyers lifetimes. It is a unique opportunity and hopefully one that we will not see for quite some time. To get the most out of this opportunity, be sure to search Austin homes with Reilly Realtors. Whether you're looking for a home in Pflugerville, Cedarpark, Lakeway, etc., Reilly Realtors is ready to help make your housing dreams become a reality.

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