From August of 2005 to May of this year, prices of residential real estate in Somerset County have stabilized, the inventory of properties available has climbed substantially, and the number of sales made has leveled off or fallen as much as 20% over the same period in prior years.  This appeared to be a seasonal happening in extreme, but when it persisted into March and April, it became evident that we were entering a new phase in the real estate market.  The spring market of 2006 is soft, and in some places promises to become even softer, as inventory stays on the market longer than in recent memory.

Lower prices seem inevitable, as sellers whose timetables do not allow for six-month marketing become anxious, and reduce prices to make it possible for them to move on with their plans.  This could create a vicious circle - as buyers see more price reductions by sellers who need to move forward, those buyers’ expectations will grow, and they may expect even lower prices, especially from those sellers, who have already indicated their anxiety by lowering their prices. 

Sellers whose plans are not in jeopardy will be forced to decide whether to lower their own prices or wait out the market, but if the number of reductions reaches a certain critical mass, all sellers will have to face the reality of the market and reduce their prices to move on. However, should interest rates rise in the meantime, buyers may retire from the search entirely – if they can.  However, interest rates would have to exceed 8% to have an impact, according to some, and that level seems unlikely to happen in the foreseeable future. 

Another factor affecting the real estate market is the price of gasoline.  The increase in the cost of driving hits the lower income levels disproportionately – a larger percentage of their monthly budget goes to gasoline.  If the monthly cost of gasoline increases by $50, that’s almost $10,000 in mortgage amount.  Without the first-time buyers – usually lower income – the rest of the real estate market may stall, as that slowdown prevents sellers from moving up.

I have implied that buyers have the option of buying or not buying.  In fact, just like some sellers, some buyers must buy as families expand (or contract), or the financial benefits of home ownership become imperative.  By this summer we should see more clearly where this market is going.  If inventories decline not by selling, but by being withdrawn from the market without selling, buyers will have fewer choices, and those who feel obligated to buy may not benefit as much as those who step up to the plate in the next two months. 

It’s getting interesting.