Posted on February 4, 2009
As a realtor, one of the most common questions I now get is "how is the real estate market doing?" The next question is "when is the market going to turn around?" I track the market on an ongoing basis, so answering the first question is fairly routine. Knowing where the real estate market is headed is another matter. No one really knows for sure. However, I've done some analysis to see if I could come up with some clues.
On my web site, I publish graphs that show average home selling prices for North Kitsap, SE Jefferson County and Bainbridge Island over the past several years. I have added trend lines on those graphs that show the rate of increase or decrease in selling prices during specific time periods. In two areas (North Kitsap and Bainbridge) there are three time periods, an initial period of modest price increases, a middle period of rapid increases and a recent period of significant price decreases. My data for Jefferson County does not go back far enough to show the initial period, but I know from personal experience that the growth there during the initial period was similar to North Kitsap at best, and probably slower. The average price level was also similar or lower during the initial period. For this analysis, I used the same initial growth rate for Jefferson County as was calculated for North Kitsap, and assumed the initial average price level was slightly below North Kitsap's.
In North Kitsap, the initial period growth (up to early 2002, shown in green on the graph) was about 3.3 percent increase in average price per year. I don't have data prior to December 2000, however, I do know that the growth prior to then was at a similar moderate rate. From mid 2002 to mid 2007 (shown in red), the annual growth rate jumped to about 19 percent increase per year. During 2007 (shown in black) the trend reversed and settled into a decline of about 10 percent per year.
What can I predict about the future of the North Kitsap market based on this data? I believe it would be reasonable to think that the initial trend line (green) represents a floor average price level below which we are unlikely to go. If the current average price decline trend line (black) were to continue at its current rate, the initial trend line and the current decline line would intersect in mid 2010 at an average price of about $250,000. The average price is currently $324,000.
My feeling is that the average price downward trend will level out before mid 2010 and that the average price won't reach $250,000, but it could easily be mid-2010 and beyond before prices start upward again.
Looking at the trend lines and current percentage annual decrease, it is important to remember a point I made in an earlier posting (What's Driving the Average Price Decrease?
) - not all of the decline in average prices is due to a reduction in selling price of individual properties. A substantial portion is driven by the fact that fewer upper-end homes are being sold.
In Bainbridge Island, the initial period growth (up to late 2002, shown in green on the graph) was about .8 percent increase in average price per year. From mid 2002 to mid 2007 (shown in red), the annual growth rate jumped to about 22 percent increase per year. During 2008 (shown in black), the trend reversed and settled into a decline of about 24 percent per year.
If the current average price decline (black) were to continue at its current rate, the initial trend line and the current decline line would intersect in mid 2009 at an average price of just under $500,000. The average price is currently $560,000. It is not hard to imagine the average price reaching $500,000, but I would expect the declines to moderate this year - meaning it would reach that point later in the year.
SE Jefferson County
In SE Jefferson County, the initial period growth (shown in green on the graph) was assumed to be 3.3 percent increase in average price per year. From late 2004 to late 2006 (shown in red), the annual growth rate jumped to about 18 percent increase per year. During 2006 (shown in black), the trend reversed and settled into a decline of about 5.7 percent per year.
If the current average price decline trend line (black) were to continue at its current rate, the initial trend line and the current decline line would intersect in early 2012 at an average price of just under $260,000. The average price is currently $316,000. I don't expect the average price will continue to decline until 2012, but could easily flatten out at a reduced level somewhere above $260,000 for a time before it begins an upward trend again, probably at a more modest rate.
Trend analysis uses past events to predict the future. There are many unusual factors at work affecting the current real estate market. A significant change in any of them could change the market environment enough to alter the trend line. One example is the number of buyers actively in the market for a home. The federal economic stimulus package might contain a tax credit for home buyers that, unlike the current credit, would not need to be repaid and may apply to buyers other than first time buyers. If put into effect, such a credit could bring more buyers into the market and put upward pressure on prices.