June 27 — Identifying the bottom of a real estate cycle is a trick that is just about impossible to master. We at Topretirements have been exploring this question for over a year now, wondering if it is finally the right time to buy into a retirement community or active adult community. Unfortunately, there is no definitive answer in sight. Today’s New York Times article, “Retirees Find the Time May Be Right to Buy“, examined this question, profiling the experiences several retirees had as they explored the retirement community real estate market.
The common thread in their adventures is the effect dropping real estate prices have in their view of the market. According to Case-Schiller data, prices in 20 of the top U.S. markets were off 15% in April vs. the year ago April. Prices in the first quarter of 2008 were off 14% vs. the same quarter of 2007. Fueled by foreclosures, prices in Miami, Phoenix, and Las Vegas dropped over 25% in April vs. year ago. Prices in these markets have now been diving steadily for over 2 years.
One reason for buyers to finally emerge from their bunkers is that, given the relentless price drops, there are now properties coming on the market at what look like reasonable prices. And when a serious buyer senses a bargain and a seller who is open to negotiation, sales start happening.
A good thing about the U.S. economy is that all markets in the U.S. do not behave the same. Some cities, notably Charlotte, did not see the big price run-ups as other areas, and as a result are not experiencing significant declines. Even in Florida, which has not been experiencing as much retiree immigration as it used to, there are real differences. Northern and middle Florida saw less excess, so these markets have been much more stable than much of South Florida. In Miami and Fort Myers there was too much building and too much speculation – in these areas inventories are too high and prices continue to fall. The disparity in markets is another factor that makes it hard to know if prices have reached a bottom in the markets you are interested in.
The main retiree interviewed in the Times story, Franke Watson, recently purchased a home in Prescott, AZ. The house was listed originally for sale at $430,000. When Mr. Watson saw it the price had been lowered to $349,000. He offered $300,000, and he and the owner eventually agreed upon $309,000 – a 28% discount from the original listing price.
The Sarasota Herald-Tribune had a recent article, “Have Home Prices Hit Bottom?“, with one of the more interesting ways of looking at home prices. Their analysis assumes that the average annual increase in home prices has traditionally been around 6-7% a year. Obviously in 2005 and 2006 the hottest real estate markets in the U.S. got seriously out of hand. In Sarasota, home prices increased 32% in 2005 alone! Since then prices are down in the hot areas. The article points out that if you assume a 6-7% annual price increase from 1999 on, the current prices are, after the correction, pretty close to where they should be.
The biggest problem facing many retirees right now is the inability to sell their current home. They do have an advantage over most other real estate buyers, though, and that is that they generally have plenty of equity. According to the Times article, many of those folks are taking the plunge, or at least thinking about taking a big step. Their rationale seems to be their estimate that their house will eventually sell, so why not take advantage of the current bargains to be had now.