Market performance for the first half of 2010 was excellent relative to 2009. All market indicators point to a slowly strengthening housing market. Both single family homes and condominiums are demonstrating significant improvement in unit sales, driven by government incentives, pent-up demand and low prices. Pending sales spiked in March and April as buyers rushed to take advantage of the government housing programs prior to their expiration on April 30th. Subsequent to this period of heightened activity, pending sales volume in a number of markets returned to more normalized levels, yet continues to be significantly higher than any time in the past eighteen months.
Fairfield County showed particular market vitality during the spring selling season relative to prior periods with strong activity in most price categories and six straight months of pending sales increases. Even luxury, which has been particularly weak for the past two years, demonstrated improved performance with over thirty multi-million dollar homes pended or sold since the first of the year. William Pitt Sotheby’s International Realty has been very active representing buyers and sellers in this segment. We believe the increased transaction pace of these exceptional properties bodes well for the luxury segment as we move forward.
Single family home prices appear to have stabilized, in most markets, at new lower levels. While the stabilization is welcome, prices are soft when compared to prior years. On an overall basis, prices remain 20% to 30% lower than during the market peak of 2005. Increased price stability is a welcome trend for both buyers and sellers as it gives all parties in the marketplace a better sense of appropriate valuations. As for condominiums, despite the pick-up in sales activity, prices are showing continued weakness as supply outpaces demand.
We are cautiously optimistic about continued market improvement in the second half of the year, but recognize that housing is clearly impacted by the broader economic recovery which is still shaky. Potential homebuyers remain skittish after the financial crisis of 2008 – 2009. Therefore, any hint of an economic slowdown has the potential to negatively impact the housing market recovery. We are encouraged by the current market activity, but recognize that until more buyers enter the market with confidence our local housing recovery will remain tentative.
I hope you find our analysis of the second quarter results of 2010 helpful as you evaluate your personal real estate holdings. As always, if we can be of assistance any time or place, please contacts us. We are here to serve you.
Following a very strong first quarter, pending home sales in Fairfield County continued their upward march throughout the second quarter of 2010, posting solid month over month gains. Pending sales volume reached its highest point in over two years in June 2010, up 314% from the nadir eighteen months ago in January 2009. In both the Shoreline and Litchfield County areas, where the rush to take advantage of the government home buyer tax incentives strongly influenced buyers to step forward through April 30th, pending sales in May and June declined versus their March and April highs. It is important to note that despite this drop-off, pending and closed sales levels remain significantly higher than 2009 levels, and slightly below 2008 levels.
Inventory levels in all markets remain about 10% above the past two year average in response to the current pace of sales. After some mid-winter declines, inventory levels rose somewhat. This seasonal adjustment is to be expected, as we move into the traditionally strong spring and summer selling periods, where potential sellers frequently list their homes for sale. Some of the inventory increase is caused by homeowners who perceive an improvement in market conditions. Other sellers are listing because they no longer need, or can afford, the property. The elevated inventory levels continue to give buyers the upper hand in most negotiations.
Consistent with the less-than-straight path of our housing recovery, the Consumer Confidence Index, a key measure of people’s willingness to spend, had peaks and valleys this spring. The Consumer Confidence Index, which had been on the rise for three consecutive months, declined by ten points in June, indicating some ongoing worry about the state of the economy.
The index now stands at 52.9 (1985=100), down from 62.7 in May. While the June decline in consumer confidence was unwelcome, consumer confidence levels continue to grow on an annualized basis.
Closed sales, the result of a strong March and April selling season, continued to strengthen in the second quarter of 2010. In fact, most markets had closed sales levels for the second quarter 2010 that were the highest in two years. In concert with the higher sales levels came significantly improved dollar volume figures, the result of a number of high-end sales during the spring selling season.
In Fairfield County, closed unit sales increased on average 48% versus 2009, while dollar volume increased 56%. Ridgefield and Rowayton demonstrated the strongest market performance improving 121% and 171%, respectively. Despite the clear improvement in sales activity, unit sales levels remain about 20% below second quarter 2007 levels.
The Shoreline communities continued to post healthy overall sales gains of approximately 30% versus the previous year, while dollar volume improved 43%. Stonington and Madison were the strongest performers achieving 75% and 53% improvement in sales, respectively. While closed sales were excellent versus both 2008 and 2009, they remain below 2007 levels in all Shoreline markets except Lyme and Old Lyme.
After a lackluster first quarter, Litchfield County markets really picked up steam in the second quarter of 2010, posting overall unit sales gains of 30% and dollar volume gains of 62%! In some markets, unit sales improved to the magnitude of 200% to 300%, as buyers took advantage of the beautiful spring weather and advantageous market conditions to purchase homes. While many of these markets have low sales volume, which magnifies market movements on a percentage basis, it is impressive to see that several of the traditionally strong markets like Sharon, Warren and Roxbury had percentage sales improvements in excess of 250%. Additionally, the uniquely positive dollar volume improvement reflects several very high-end sales which are crucial to this area returning to a sustained positive market direction.
HOME PRICES APPEAR TO HAVE REACHED BOTTOM IN THE MAJORITY OF MARKETS
While the severe dislocations we have experienced in the past two years requires more than two quarters of data to firmly establish pricing trends, we do believe the January through June 2010 data suggests we have reached bottom for most property types.
Results for the second quarter of 2010 improved slightly versus the second quarter of 2009, with Fairfield County median prices up 8%, The Shoreline up 8%, and Litchfield County up 2%. The markets with stable to improving median prices far outweigh those with declines at this point in time. In addition, as we analyze the sales by price point it becomes clear that in all but the most thinly traded markets, prices are holding their own as sales volume has improved substantially. As in all broad based markets, there is a mixed bag of results, with towns such as Darien, Sharon and New London experiencing double digit improvement, while other communities continue to decline versus 2009. With few exceptions, prices in all markets remain 15% to 30% below their peak despite an improving sales picture.
The biggest impact on the future direction of prices will be sales activity. At the current level of sales activity, we would expect prices to remain stable. Should we experience strong positive or negative changes in demand, prices will respond accordingly. Each individual town also has certain price segments that are very active, generally the lower price points. Prices are the most stable in these markets, albeit at low levels. As we move up the price ladder and activity thins, there is just not enough reliable data to accurately determine whether we are at bottom or not. Sellers who have adjusted their prices to reflect current market conditions should expect to achieve close to their asking price. However, in markets that are thinly traded where sellers have not adjusted expectations, we would expect further downward pressure. In all price categories, buyers are very conservative, assessing their options and negotiating aggressively.
No pricing discussion would be complete without mentioning that short sales and foreclosure continue to have a negative impact on home prices. In many markets, individual sellers are competing with banks for the limited buyers. With banks utilizing a “price to sell” strategy, homeowners are being forced to meet or exceed these low levels in order to sell.
NEW CONSTRUCTION BEGINS TO IMPROVE
Of all segments of the real estate market, new construction has been hardest hit during this downturn. With most new construction concentrated in the higher price ranges, it has mirrored the luxury segment performance, though at even more depressed levels. While buyers value new construction, in this market they have often been unwilling or unable to pay the premium associated with new construction offerings. As a result, these homes have languished on the market or have been rented. Happily, we are beginning to see some early signs of improvement in new construction as the housing market recovers.
There are now increasing numbers of able buyers in the market, and builders are starting to adjust their pricing expectations to be more in sync with marketplace realities. Because of the small sales levels for new construction, we cannot accurately gauge price changes, but can say with confidence there remains significant downward pricing pressure on new construction, as inventory levels remain elevated and demand is weak. Because a significant number of newly constructed properties have been rented over the past two years, as market conditions improve we expect inventory to increase as builders bring these homes back on the market.
SALES CONTINUE TO IMPROVE IN THE ENTRY TO MID-PRICE RANGE
In the second quarter of 2010, the entry to mid-price segments continued to drive market activity. Of particular note is that the entry segment in both Fairfield County and Litchfield County, while clearly still dominant, is representing a decreasing percentage of total sales, while the next price tier is slowly gaining in importance. This is a very positive development for the marketplace that we anticipate to continue as housing recovers.
In Fairfield County homes priced up to $1,500,000 account continue to account for the lion’s share of the market, fully 91% of single family home sales. Within this price band there has been a shift in the relative importance of homes priced up to $799,000 versus the next higher pricing tier. In the second quarter of 2010 homes at the entry pricing tier, values up to $799,000, declined in terms of percentage of the market to represent 72% percent of all unit sales versus 77% in the second quarter of 2009. The next pricing tier higher, homes priced between $800,000 and $1,499,000, gained in relative importance to account for 19% of sales. In Litchfield County homes priced below $1,000,000 account for 95% of all sales at this time, down from 98% last quarter. Litchfield County experienced much of the same upwards sales migration as Fairfield County experienced. In the Shoreline homes where we have not seen any real shift in price point activity, homes priced up to $750,000 account for 93% of activity.
Luxury continues to be soft, accounting for 1% to 2% of total sales. Despite this sobering figure, luxury achieved some of the strongest sales growth of the quarter and we have had some notable sales of very high-end homes this spring. The profile of homes successfully transacted continues to be one-of-a-kind, special properties that are rarely available. There was some outstanding news for home buyers and sellers of high cost homes. The jumbo loan market is much improved, with more banks now offering big loans as well as cutting rates even for fixed thirty-year products. We anticipate the stronger jumbo loan market will help drive activity in the higher price points going forward.
In the active market segments, prices are stable to slightly improved, as there is greater equilibrium between buyer and seller. In the entry segments, up to a quarter of all homes available for sale have gone to contract. We have seen a significant improvement in market conditions for homes in the entry to mid-price range. In addition, properties in this price category are selling almost 30% more quickly than their counterparts in higher price categories, and good houses in desirable locations are commonly receiving multiple offers in this time frame.
THE CONDOMINIUM MARKET SLOWLY GAINS TRACTION
As the condominium market gradually recovers from an extended period of weakness, sales and other market indicators continued to improve throughout the second quarter of 2010. Like single family homes, condominium sales responded positively to the government tax incentives with very strong March and April pending sales figures. As a result, closed sales for June 2010 in Litchfield County, The Shoreline and Fairfield County were the highest in over two years. Versus the second quarter 2009, closed sales in the second quarter of 2010 rose between 30% and 50%.
Pending sales, the best forward indicator of market health, are up 66% from one year ago in Fairfield County and have attained their highest levels in three years. In the Shoreline communities, after a fourth quarter of 2009 dip, pending sales improved substantially, yet remain 6% below last year’s levels. In Litchfield County, pending sales have improved for three straight quarters and are 2% higher than the same period last year. Despite the pick-up, it should be noted that pending sales are still relatively weak in Litchfield County - 15% lower than 2007.
The factors, which we have reported for some time now as holding back the condominium market, continue to weigh down sales activity. Particularly for the more expensive condominiums, the fact that the traditional buyer pool, people down-sizing, cannot sell their homes remains a significant impediment. There is increased optimism; agents report their condominium listings being shown more frequently than in prior months, but many buyers have to sell before they buy.
Inventory levels in all markets are slowly declining, as properties are sold and there is an unspoken moratorium on new construction. Months Supply of Inventory (MSI), a useful expression of how long it would take to sell the current market inventory at the present rate of sales, has improved substantially. If we can stay the course, Fairfield County now has nine months of condominium inventory, The Shoreline twelve months, and Litchfield County twenty seven months.
Despite the positive reduction in inventory levels, the market remains in disequilibrium because of relatively weak demand. Prices continue to experience downward pressure, which we expect to continue for some time until there is greater market equilibrium.
WHERE WE ARE HEADED:
With the strong first and second quarter 2010 sales results, we feel confident that the Connecticut real estate market will continue to slowly strengthen as we move forward this year. We recognize that, like the overall economy, the housing recovery will not be a straight line and the next 24 months will be rocky. Our optimism is tempered with caution for several reasons. As we go to press, mortgage rates have, for the third week in a row, hit new generational 30-year lows. While borrowing costs have tumbled, this has not stimulated demand to any noticeable degree. In our current economic environment, low interest rates are not enough to spur home purchases independent of other factors, such as a confident consumer and a healthy economy that fuels job growth and household formation.
Despite some significant headwinds, we are very encouraged that transactions are now moving steadily into the higher price categories, supporting our view that the housing recovery will be a bottom up recovery. Improving sales in the higher price categories are a function of both greater availability of jumbo mortgage financing and a sense among affluent buyers that now is a smart time to buy.
Prices remain low, and despite some hints of improvement, we do not have sustained appreciation. We believe that the backlog of foreclosed and short-sale properties, coupled with the reduced buyer pool, will keep a lid on prices for the foreseeable future.
At William Pitt Sotheby’s International Realty, our view is that this market represents an unprecedented opportunity for both buyers and sellers. Inventory is terrific and in all price points there are wonderful homes available for sale in highly desirable areas. No matter what the motivation to move, we believe home buyers and sellers alike can take advantage of these unique market conditions.
