I have a theory that 25% of houses currently on the market in Birmingham are vacant, and are in some fashion related to speculative activity. Speculators fall into three groups:
1) Investors who have watched too many “Flip this House” episodes,
2) Investors who buy to rent and are looking for a longer term gain, probably the most stable of the categories, and
3) Individuals who over-buy to occupy, make some quick improvements (not always the right ones), and want to flip for a large profit in a short period of time. This third group is the largest one, and it developed when the recession and stock market decline of 2000 scared a large number of people out of the stock market and into real estate as an investment. From 2000 until 2006 Real Estate may well have been a better bet than the stock market.
Prices of residential houses have not yet declined enough to absorb the excess inventory of houses for sale. Building activity has not dropped as quickly as sales, resulting in generally higher inventory absorption rates, expressed as months of inventory, therefore postponing any recovery. Often too much was paid for a house which coupled with pressure on sales prices squeezes profit margins whether for new construction or the retail sellers expectation. The Birmingham market is seeing similar conditions to what we see reported nationally but on a somewhat reduced and delayed basis.
In the attached chart we see the “excess sales” in orange. the excess is made up of both the number of houses sold and how much was paid. Please click on chart for larger version. While this chart goes through the end of April, May and june have not changed the picture. The excess was drawn by taking the long term averages and drawing a straight line Line B in the drawing, to “best fit”, excluding the fast run up beginning in the end of 2004 beginning of 2005. The chart shows that the 12 month moving average (line A) dropped below the long term line in November of 2007. This would imply a three year period of excess price and activity. I doubt it will take three years to correct the imbalance for reasons I’ll explore further in the next post.