WHY ARE THE PRICES OF HOMES DROPPING SUBSTANTIALLY?

By
Real Estate Agent with Realty Executives

From the article:  "Sales & Marketing" by Steve Harney, April 2009 issue of Realtor Magazine.

 

Ten years ago the role of the Realtor was seen as an information provider....Today, any person with  an internet connection can access most of what they need to know about the real estate market, including how much their house is "worth".

 

Today, the Realtor has a new role to play.  Although buyers and sellers may have the information right in front of them, they don't always understand the meaning.  The job of the Realtor now is to offer insights helping them interpret the information.  Here are some insights you can offer in response to the questions buyers and sellers are asking today.

 

1.  Why are the prices of homes dropping substantially in today's market?

 

Appreciation went into Overdrive....  Historically homes have appreciated at a rate of about 5% per year.  In the six years between 2000 and 2006, appreciation was 89%, or nearly 15% per year on average, which was totally inconsistent and unsustainable.  Today's correction is a move back to the stability of a healthy market.

            1980 - 1985 ...............25%

            1985 - 1990 .....................27%

            1990 - 1995 ................25%

            1995 - 2000 ............................29%

            2000 - 2006 .................................................................89%

 

2.  How do I determine the direction of prices in my market ?

 

Although there are no steadfast rules to determine the future pricing, total inventory divided by the number of houses sold per month is a great guideline.  A normalized or balanced market has five to six months of inventory.  If 100 houses sell a month, there should 500 to 600 houses in active inventory.  Based on this principle, if you have on to two months of inventory, double digit appreciation is likely to occur.  Lack of supply will cause potential buyers to clamor over the few homes that are for sale, which in turn drives prices higher.  On the other end of the spectrum (where many markets are right now), there is a seven to eight month inventory.  With this abundance of supply, there simply aren't enough buyers to support the number of homes for sale.

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