by Rick Uhlmann | October 27, 2015
College of Business and Behavioral Science, Clemson University
CLEMSON — Despite improving employment and economic growth, many housing markets across the country are not responding positively due to a lingering hangover from the economic downturn, a Clemson University researcher has found.
Tom Springer, professor of real estate at Clemson, said research data from a 15-year period, shows that even though a housing market may experience a rebound in employment and economic growth, many foreclosed properties still on the market continue to plague residential real estate transactions.
Lingering foreclosed homes are affecting residential real estate sales.
Research by Springer and co-authors Michael Sklarz, president, Collateral Analytics, Honolulu, Hawaii; and Elaine Worzala, professor of real estate, College of Charleston, sought to measure the sensitivity of housing market sales volumes to changes in economic conditions. The external forces included local employment growth, the national economy, interest rate levels, lending criteria and the presence of foreclosed homes.
The study measured housing transaction reactions to the various economic influences using data from 40 U.S. cities from the first quarter of 2000 to the third quarter of 2014.
Research found that in 28 of the 40 metro areas where employment grew, single-family transaction volume responded accordingly.
“It’s clear that jobs matter and have a direct influence on improving residential transactions that were previously lagging,” Springer said.
However, the research also showed certain economic conditions negate the benefits of job creation.
“In the recession scenario, only half of the 40 markets in the study show employment increases having a positive effect on the home sales,” Springer said. “It’s clear that some markets are not rebounding from the ‘Great Recession’ and that economic factors affect how long it takes for cyclical markets to adjust.”
One of the biggest deterrents is foreclosure properties. When they become a significant part of an area’s overall sales mix the positive impacts of employment and economic growth are completely negated.
“If 25 percent of the real estate sales are foreclosures, it doesn’t matter if the economy or employment are growing. When the foreclosure property rate exceeds 25 percent in a market, housing sales actually decrease and the market becomes dysfunctional,” Springer said. A higher percentage of foreclosure properties in a local sales mix creates pricing uncertainties that affect buyers and sellers.
In explaining the dysfunction, Springer said when there are a lot of foreclosure properties on the market, people have difficulty valuing properties.
“For example, the seller of a non-foreclosed home is going to find they are getting ‘low-ball’ offers because would-be buyers are comparing their house to the values of others that are distressed,” he said.
“It stands to reason that buyers are more apt to make lower offers on non-distressed properties when a higher percentage of foreclosures is in the sales mix. In turn, the sellers of these properties are more likely to reject those offers,” Springer added. “As a result, sellers of non-distressed properties are motivated to delay their decision to sell until the foreclosures have substantially cleared the market. It becomes a real market quandary.”
For the average market in the study, the results of the study estimate that:
• Under average market conditions, a 1 percent increase in employment will generate a 2.7 percent increase in housing sales transaction volume.
• Under a simulated boom economy, the response to an employment increase is a 4.7 percent increase in housing sales transaction volume.
• Under a simulated recession, the response to an employment increase is a slight decrease in housing sales transaction volume. Thus, while employment growth is beneficial under any economic scenario, the average housing market does not benefit when under recession conditions.
View the original article here.