There may be more than one bottom to the market

Just today a 2,800 square foot home came on the market for $599,000. My guess is that it will sell in the lower 600’s. It was just 3 years ago that this home would have sold in the mid 800’s. $599,000 was the price of a nice 3-bedroom condo with a 2-car garage. There are great deals for homes over the $600,000 mark. At the same time, the last condo that I listed was a 1,178 square foot property that had reached down into the $220’s earlier this year. Because of the staging, marketing and sheer number of buyers in this price range, it sold with multiple offers for $280,000. The chart below explains a bit of the market swing.

price range chart

For more explanation, I found a great article written by Orange County Real Estate Broker and author of Real Estate the Ethical Way, Bob Hunt.

A recent headline in the business section of the Orange County (Calif.) Register noted that the median price of home sales had risen, but that the statistic was misleading. Most of my Realtor® colleagues would complain that the paper was going negative again. OK, point conceded; but the paper was correct.

The Register had noted that the rise in the median price was explained by the fact that more sales of higher priced properties had occurred in the present period than had in the preceding period. This didn’t mean that the prices or values of any particular properties had risen; only that the middle point of the sales had risen. This phenomenon deserves elaboration. I suspect that it is not a uniquely O.C. phenomenon. Moreover, not understanding it can cause serious misperceptions.

All real estate is local, to be sure. Nonetheless, different markets still bear similarities. One is that most markets contain a number of price ranges. Think of them as layers, something like geological strata.

For purposes of explanation, imagine the following hypothetical example (one which is grossly oversimplified when compared to real markets): This market has 4 layers. The bottom range — say, $75,000 – $150,000 — consists of one and two-bedroom condominiums. Next — between $150,000 – $250,000 — are three-bedroom condominiums and two-bedroom detached homes. Above that layer — with a wider range of $250,000 – $500,000 — we find three and four-bedroom homes situated on lots of increasing sizes within neighborhoods of varying amenities. Finally, in the top layer there are homes ranging in price from $500,000- $1 million.

Of course any real market would likely be much more complex and could be sliced into a greater number of layers. But, for purposes of illustration, this will work.

Different segments of the market may be affected by different events. The bottom might be hit by layoffs at the local factory, whereas the top might feel the results from a crashing stock market. Sometimes these events will have a ripple effect, but not necessarily always.

During the past couple of years, disparate but often-related events have affected local real estate markets at different levels. Think of these market-affecting events as waves. The first wave to hit was the resetting of crazy loans that borrowers couldn’t afford. This did the most damage at the bottom levels. More recently, the effects of rising unemployment rates are showing up in the middle price ranges. Finally, the diminishment of substantial wealth experienced both by owners of now-suffering businesses and by casualties of collapses in the financial markets is a likely third wave should this recession stretch out much longer. All of these waves may have ripple effects.

What does all this have to do with “the bottom”? Simply this: In many parts of the country, as well as nationally, a number of pundits and experts have pronounced that we appear to have reached “the bottom of the market.” But, we should ask, the bottom of which level? Maybe the bottom level of various markets isn’t going to go any lower; but what about the levels above them, and above them, etc.?

As more sales occur at the 2nd, 3rd, 4th, and etc. levels of local markets, the median price will rise. But does this mean that prices have headed back up? Not necessarily; not even likely. When the house that was formerly worth $600,000 sells for $500,000, that may raise the median; but it isn’t indicative of price increases at any level.

Indeed, in many areas we may have reached the bottom of the bottom (level). But have all the levels reached their bottom? That remains to be seen.

My friend and associate, Bob Hunt is right. Each market comes with its own bottom.

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  1. On August 25, 2009 Which is best for the borrower | says:

    […] couple weeks ago, I shared an article from Bob Hunt about the bottom of the market. Recently, he published another great article that posed the question: Short sale, Foreclosure or […]

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