By Tom Reed, Partner & Broker-In-Charge
Charter One Realty
Market improvement on both the Island and the mainland continues to be both price dependent and use dependent where the improvements are beginning at the lower price points and working their way into higher and higher price points. When one breaks down the market by price and property type, absorption rates can be used to determine the market health for the various segments.
Absorption rates ask the following question: “Based upon current consumption rates, how long will it take to consume all current inventory within the market segment in question?”. The breakpoint is six months worth of inventory representing a balanced market with no pricing pressure. Market segments with less than six months worth of inventory are in a seller’s market pushing prices upward; whereas, market segments with more than six months worth of inventory are in a buyer’s market pushing pricing downward.
Home Market
To appreciate where we are headed, perspective regarding where we have come from is useful. At the end of 2014, the home market was only experiencing a seller’s market for homeowner’s priced under $400K on the Island and $300K on the mainland. Currently, the seller’s market has improved to include homeowners priced under $500K on the Island and under $400K on the mainland. At the same time, homes priced up to $700K on the Island and $500K on the mainland are in a balanced market. Homes priced up to $1.25M on the Island and $1.0M on the mainland are in a weak buyer’s market. Unfortunately, homes priced above $1.25M on the Island and $1.0M on the mainland continue to face 2-3 years worth of inventory causing downward pressure on pricing in this segment.
The good news is that the health in the home market has moved up by $100K in both the Island and the mainland home market during the course of 2015. In essence, the market is getting healthy from the bottom up – and you can expect more of the same for 2016.
Villa Market
Whereas the home market has a very large primary homebuyer component driving it, discretionary spending is the primary driver of the villa market. Most villas in our market are located on the Island. As such, that market provides the most insight, so we will look there for guidance.
Going back to 2014, there was no seller’s market in the villa market and a balanced market was only found for the pricing segment under $200K. Furthermore, once owners priced their villas above $700K, they were facing three years worth of inventory. That began to change in 2015 with more discretionary money entering our market.
Currently, villas priced under $200K are experiencing a seller’s market with a balanced market extending up to the $300K price range. Furthermore, villa owners do not experience the challenge of three years worth of inventory until they price their unit above $1M. So, similar to the home market, the health in the villa market has moved up by $100K during the course of 2015. Should the trend of increased discretionary spending continue, we should expect further improvement in the villa market for 2016.
Lot Market
The lot market continues to struggle both on the Island and the mainland. Inventory in all segments continues to be unhealthy with one exception: lots priced under $200K both on the Island and the mainland. While that segment is still experiencing a buyer’s market, it is not as challenged as the other pricing market segments that are in a strong buyer’s market.
With that being said, homebuilders tend to be the primary consumer of lots. We are beginning to see more homebuilders enter the market to build spec homes. They are the consumers that are helping to improve the $200K and under pricing segment. As the availability of lots priced within this $200K and under segment dwindles and new construction continues, the lot market will begin to improve just as the home and villa markets have – from the bottom up. Will we see it in 2106? Only time will tell.
Summary
Over the course of 2015, both homes and villas have seen the lower price points that were experiencing a seller’s market have that seller’s market move into $100K higher price points. However, the higher price points for both homes and villas continue to face real market challenges. With that being said, 2016 should see both the home and villa markets continue to improve from the lower price points into higher and higher price points. For lots, the market health for all segments priced over $200K continues to be a major hurdle. However, help may be on the way as new construction continues to increase. Over the course of 2016, we should see homes, villas and lots experience improved market health into higher price points when compared to 2015’s year-end numbers as our real estate market continues its steady march into brighter days.
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