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Supply — The quantity of a commodity that producers are willing to provide to the market at a given price.

Demand — The quantity of a commodity that buyers are willing to purchase in the market at a given price.

Trend — The general direction of the market.

(CME Market Education Department, An Introduction to Futures and Options, 2006, Glossary)

Hoping to better understand the world of a commodity trader I recently read a CME company manual called An Introduction to Futures and Options. What I found was one of the best written, most accessible, and, of all things, interesting company manuals that I have ever read. On page 69 was a chart with a very simple example of how a market works. (Same means the same or opposite.):

SUPPLY DEMAND PRICE
Up Down Falls
Down Same Rises
Same Up Rises
Same Down Falls

We all talk about the real estate market a lot, but sometimes I wonder how often we lose sight of the meaning of the word market. For most people the item they purchase in a real estate transaction is their home. It is held far more closely to the heart than any investment that shows itself as numbers on a screen. However, when it comes to real estate transactions that home needs to be viewed in a different light. To make the best choice and be able to close a transaction quickly the fact that real estate is a market needs to be at the forefront of the contract.

How is the real estate market?

Keeping Current Matters 2/2012 Slide

This is a question that is on most everyone’s mind. And conflicting news reports don’t make the answer very clear. Last Thursday (2/23) the Wall Street Journal reported that, nationally, home sales have been rising and that the inventory level is looking healthy. It’s no secret that inventory levels have been sky high lately. Keeping that in mind, have a look at an NAR article published the next day (2/24). While it admits that we aren’t out of the thick yet, times are still tough, the rising prices in rentals might entice more buyers to become home owners. In reference to the chart above these two articles seem to predict supply is down and demand is rising, according to our chart prices should rise accordingly.

Jump forward to Monday (2/27) when Reuters quoted Economist Michael Strauss as saying we are seeing a turn in a number of housing statistics, his quote is almost the same as Economist Guy Berger’s quote in the WSJ article from last week. However, Reuters continues to report,

But with the foreclosure tide yet to recede and continuing to depress prices, recovery will be a long, drawn-out affair.

On the same day, Keeping Current Matters (KCM) reminded us that almost two weeks ago, on February 15, RealtyTrac posted a report about how many homes have been delayed in the foreclosure process and, thanks to the National Mortgage Settlement, will be pushed through to the REO market. In other words supply might be going up.

Looking at our handy chart again there are two outcomes we can see:

  1. Supply and demand rise – prices rise
  2. Supply rises but demand does not – prices fall

How do you like that for a prediction!

Never fear, we have more data to review. So far all of these reports have focused on the whole country. But, real estate is local. What’s happening in Austin is not the same as Chicago. On February 8, CoreLogic reported on foreclosures for December 2011, breaking the data down to states and major metropolitan areas. I highly suggest reading the whole report.

Items to note from the CoreLogic report

  1. Illinois (5.4%) was number 3 of the five states with the highest foreclosure inventory. Preceded by Florida (11.9%) and New Jersey (6.4%); followed by Nevada (5.3%) and New York (4.6%).
  2. There are two charts comparing states and major metropolitan areas. Here is the national, Illinois, and Chicago data of how many mortgages are more than 90 days late in payment (which is when the foreclosure process usually starts), how many mortgages are currently in foreclosure, and how much that inventory has changed over the past year.
    Place >90 days late mtg. Frclsr Invntry 12mos Invntry Chg
    National 7.3% 3.4% -0.2%
    Illinois 9.2% 5.4%  0.6%
    Chicago-Joliet-Naperville 10.8% 6.3% 0.8%
  3. By having a delinquency rate of over 7% Illinois has among the most serious delinquency rates.

What can we deduce from these more local findings? 

Keeping Current Matters 2/2012 Slide

Unless we see a drastic rise in demand over the coming months, supply will most likely rise again in Chicago and Illinois. If that possible demand will be coming from people who are currently renting then it begs the question of how much money they have been saving.

There are two other market standards that I haven’t touched on. The price for the supply can only be as high as the demand is willing to pay. Also, everyone knows the age-old rule of buy low, sell high, but in real estate remember to take your history into account, as you would consider your portfolio in stocks. If you are planning to sell and buy again you are still in the market. You may sell for less than you paid, but you may still find a deal for a bigger nicer place that will appreciate faster as the market continues to change.

I’ll leave you with an inspiring quote from today’s KCM post. This comes from a man who wanted to move and be closer to his grandson.

I thought I was putting a price on my home. While I hold out– hoping to get a few more dollars, I am actually putting a value on my happiness.

This quote embodies the struggle we feel every day. Real estate is a market, but home is where the heart is. By the way, he lowered his asking price, sold the home in three days and is now on his way to live near his grandson.


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