A Look Backward and Forward

January 2011

In November 2007, it became startlingly clear to everyone in the real estate business that the real estate boom was coming to an abrupt halt.  No one really had any idea just how abrupt or how deep the recession would be.  What has followed is what is now known as the Great Recession.

Speaking just of the Albuquerque residential real estate market, the numbers have been breathtaking - not in a positive way!  The total number of homes sold in the peak year of 2006 was 13, 448.  That does not include the 6,611 building permits that were issued as well in that year for new home construction.  That would put the total activity at somewhere over 20,000 units.  Since that year, nearly every month has been consistently worse as compared to the same month in the prior year for nearly 48 months.  In 2010, there were 7,475 sales and 1,440 building permits.  That is about 8,900 total units, almost a 55% decrease in activity!  Add to that a decrease in average sale price from $243,000 to $216,190 and it has been quite an event!

However, lest things look too bleak, there are rays of hope.  One way to determine the length of a cycle in our market is to look at the increase or decrease in the yearly average price of residential homes.  The top of a cycle is the year of highest appreciation, and the bottom is the year of lowest appreciation or depreciation, if applicable.

The Greater Albuquerque Association of Realtors has been tracking that statistic since 1985.  Prior to 2008, there had been only two instances when there was a decrease in average price from the prior year.  In 1988, there was a -2.16% decrease in average price.  That was a result of the Tax Reform Act of 1986, the legislation which dramatically altered the tax treatment on commercial/investment real estate.  That precipitated the giant depreciation of commercial real estate which resulted in the creation of the Resolution Trust Corporation.   The RTC was the government created entity dedicated to disposing of all foreclosed upon commercial property.

Then, there was positive appreciation for the next 11 years until 2000, when we had a tiny depreciation in our average price of -0.16%.  From that year forward we had seven years of positive increases.  In 2008, we had a 4.3% decrease in average price, the biggest single year decrease since 1984.  Then in 2009, we had a 7.72% decrease!  There never were two successive years of depreciation in Albuquerque prior to 2009 that show up in the records.

But there is good news!  In 2010, we had a tiny increase.  We went from an average price of $214,662 to $216,081.  That is a tiny increase of 0.66%.  

The second piece of good news is that for the first time in five years, December sales and pending sales were up as compared to the prior year.  Our pendings in December 2010 (new contracts written) are up 13% over December 2009.

Last year, I wrote that I thought that the bottom was at hand.  I was close to right but not exactly.  We cannot say for certain that we are at the bottom until prices start to recover and there is an increase in total units closed.   Still yet to recover is the number of units sold.  In 2009, there were 7,933 closings and in 2010 there were 7,459 closings.  That is a decrease of 5.98%.  For reference, contrast that to the 13,448 of 2006, which gives us a 45% decrease in total units closed plus a decrease from an average price of $243,000 in 2006 to $216,000 last year, and you can grasp the full extent of what has happened in our market.

Finally, we have tracked the rate of appreciation in the first year after the bottom in the last two cycles.  That number is round 1.6%.  Then it has typically gathered some momentum and moves up to about 3% in the second year.

My prediction is that now we truly are at the bottom of this cycle.   With trepidation and courage, I will make the statement (not a guarantee, just a prediction) that there will not be any further decreases in price because it appears there is an increase in demand.  The median price in our market is $175,000 which indicates a high degree of affordability, which is also a good sign.  Interest rates are creeping up from a historically unprecedented 4% rate.  Our listing inventory is down from a 2008 high of 6,428 to about 4,800.  The population of Albuquerque appears stable with many prospects of incoming employers on the horizon, so I am hoping for a 2% increase in total average price as well as total units sold in 2011.  Certainly not robust but a reverse in the trend!

Thank you for taking the time to read this.  If you have any comments or questions, I would love to hear from you.  

This article was written by Peter Parnegg Co-CEO Coldwell Banker Legacy