Whether you know it or not, you really ought to thank Ray Harroun for saving your life. He did, you know. In 1911, automotive engineer Ray Harroun became the winner of the first Indianapolis 500 auto race. He won the event that is now the most famous race in the world driving a single-seat Marmon Wasp. All the other drivers–some 40 of them plus their riding mechanics–were in two-seat cars. The “mechanician’s” job was to add oil, change tires, and warn the driver when another car was trying to pass. Harroun’s single-seat car was lighter than the two-seaters, more aerodynamic, easier on tires and in general a much better design. His competitors declared the Wasp was unsafe because there was no one in the car to warn Harroun about the overtaking cars. And thus was created the first rear view mirror.
[dropcap]H[/dropcap]arroun used a rectangular mirror mounted in a streamlined cover and mounted it directly on the cowl in front of the driver’s seat with four sturdy steel rods. He called it the “mirrorscope” and his critics shut up.
There are two things about Harroun’s Wasp and its mirror that are important for this article. First, the Wasp’s hard, skinny tires and the track’s uneven brick racing surface caused the mirrorscope to vibrate so badly that it was useless during the race. All it really did was block Harroun’s view. Second, and most importantly, he won the race despite not being able to see anything behind him.
Which gets us around to the point of this article. You can’t win in real estate by solely looking behind you. Past performance, as all the mutual funds tell us, is no predictor of future events. It’s useful data, to be sure, and those who forget history are doomed to make the same mistakes over and over again. But there are outside forces on the real estate market that tend to interfere with the orderly balance of supply and demand.
I don’t know if the data is available or not, but I would love to see a two year chart of showing appointments made through the Multiple Listing Service (MLS) charted against sales activity six weeks to two months later. I believe there would be a strong correlation. Listing activity is a less accurate indicator because it has nothing to do with buyers. Nothing happens until somebody buys something. If they’re not bringing clients in to look at your house, it really isn’t on the real estate market and you have very little chance of getting it sold.
In the meantime we can see where we are at this moment by looking at sales data and we can chart it against 2012 to see how much improvement we have had.
We are in a good place. Contrary to the infamous Al Gore line, everything that should be up is up, and everything that should be down is down. Except for interest rates which are low but climbing.
So here’s the snapshot, looking in the rear view mirror, of course. Real estate values, in the 11 county Western North Carolina area served by the NC Mountains MLS, were relatively flat comparing the first six months of 2012 to 2013. The average house last year sold for $221,257. So far this year the average sales price is $220,826. That is a change of 0 percent. Unit sales are up. So is dollar volume and people are gradually gaining more confidence in the real estate market. Whenever I meet someone and they learn I’m a realtor the most common thing I’m asked is “how’s the market.” The past six months, maybe more, have been a real pleasure as I was able to report the market is good.
Let’s use two more motor sports analogies to explain things.
Regarding Ray Harroun, he figured that if a guy was behind him that’s not his problem. He wasn’t going to put in a second seat, carry a mechanic and suffer the performance penalties just to have the guy yelling “They’re catching us, Ray!” in his ear. Harroun figured he would just drive the car as best he could. Similarly you can’t price a house or project a real estate market trend solely by looking behind you. Opportunity lies ahead. And so does the big wreck.
Second, as the laps (and inventory) wind down the intensity of the battle increases. Nobody wrecks when there are 197 laps left in the race. What’s the point? But get it down to the last three laps and everybody starts wrecking. The deal is on the line, you’re running out of laps, your wife has expensive tastes and you are about to get your name and face on the Borg-Warner trophy.
The last lap is the one that pays the big money. The last house in a market will command a higher price than when there were 200 units sitting in that price range. Keep an eye on inventory. If it starts to drop in a certain price range then the value of the houses in that range, and especially new product coming into the market, will increase.
Real estate analysts like to talk about balanced markets where buyers and sellers have equal bargaining power. They say it comes when there is a six-month supply of houses in a certain price range. The supply is determined by each month’s sales levels. If you’re selling 100 houses a month and there are 600 listings in that price range then you will sell out (not counting new listings) in six months and you have a balanced market.
We’re not there yet in most areas but are very close in the sub-$200K range, particularly in Buncombe and Henderson counties. Anything under a nine-month inventory is good. Ask your realtor for the latest data to see where you stand.
What about list price versus sales price? Last year on average homes sold for 92 percent of the asking price. This year that has increased to 94 percent. Some companies do better than others in this. When you get to multiple offers on a house, you can generally count on it selling at or near the asking price.
As we get ready to look down the road and not so much in the rearview mirror I’ll give you one more piece of data. According to preliminary data, unit sales in the first six months increased 22 percent from 2,738 units to 3,337. Dollar volume also increased 22 percent, from $605,800,758 in 2012 to $736,896,209.
If you make a forecast based on that and allow some reduction in growth due to higher interest rates and other unknown factors, the reasonable person might think there could be a big bump in prices and sales volume the rest of the year. I’ll let you do the numbers lest this doesn’t pan out and someone says they were misled by that realtor guy in Hendersonville. But I can visualize Ray Harroun peeking beneath his big mirror and seeing the big wreck in front of him clearing out pretty well. He probably would have stood on the gas for all he was worth thinking this was a good time to make up lost ground.
Factors that could negatively influence market growth include multiple aspects of the economy, the continuing insanity in Washington and overseas political turmoil especially in the middle east. Politicians, as former congressman Charles Taylor used to say, can screw up a one-car funeral procession. Many believe that is exactly what will happen to the real estate market if the State Legislature reduces the tax credits for interest paid on home mortgages. Harroun wouldn’t have won the Indy 500 if his pit crew had decided the flat tire he suffered at the 340 mile mark wasn’t that big a deal. Similarly, the real estate market is not yet back to 2007 levels.
The key to real estate is the same as it is to the rest of the economy. Jobs, jobs, jobs. And I mean private sector jobs not government funded jobs of any type. It doesn’t do the national economy any long-term good to follow Keynesian economics and continue to “invest” (spend) borrowed money that will have to be repaid through higher taxes.
Market data is shown on the charts found below.