My New Blog

Today the statistic came out that one in six owe more on their home than it is worth.  Not sure how they derive that statistic, but that is probably true.  But please remember that all real estate markets are local.  Those markets that had the fastest increase in values are the hardest hit.  If you bought a home in a market that went up slowly you are probably alright.

The biggest issue for Washburn, Sawyer, and Burnett Counties where there is a large volume of second homes on lakes and rivers is where are values going in the long run.  I recently did an appraisal of a nice lake home on the border of Sawyer and Washburn Counties.  So I looked at both counties to see what the aborption rate is.  For example if 120 homes sold last year the aborption rate is 10 homes per month.   What I learned was that there is a 45 month supply of waterfront homes on the market. That is a HUGE over supply, and it is going to have a significant impact on future values.  It just has to. 

What will it take to reduce that over supply?  Ultimately it is a matter of setting a price and getting buyers back to the market.  But here's the problem.  How far will values have to come down?  That's hard to say, because I don't think second home buyers will be around until the general real estate market comes back.  In otherwords I'm not sure we can coax people back to buying a second home until other economic factors are rectified.  It may be that we have a situation where price is somewhat inelastic.  What do I mean by that?

A commodity that is sensitive to pricing is elastic.  As soon as it comes down people will buy it in larger supplies.  It is a commodity that is more sensitive to market conditions.  A commodity that is inelastic is something that no matter what price it is people either have to buy or don't have to buy.  For example the consumption of heating oil is somewhat inelastic to price sensitivity.  People have to heat their homes if they have an oil furnace. They can cut back in temperature a bit, but not totally. So they will cut back on other areas to pay more for oil.  On the otherhand it can work the other way.  It really doesn't matter what price it is, people really won't buy it because there simply isn't the demand for it.  I suppose an example of this is a plane ticket to Libya.  The fact is that if you don't have to go to Libya no matter how low that ticket gets you aren't going to buy one.  You just don't need it.

And thus we have the problem with second homes.  It may be that no matter how low prices get people simply aren't going to stream back to the market in large numbers.  People don't need second homes.  They are nice, but they can do without them.  So therefore it is really hard to know what kind of pricing should occur on these homes if that is the case.  And personally I suspect that is true to a large extent.