Turning Point? Charts Indicate Possible Market Thaw Coming

It has been a while since I have updated my charts on the multi-unit market in Weber County.  Back in 2009, I wrote a half dozen or more seller-financed transactions for investment properties and it seemed the market was trending that direction.  The charts I put together at the time certainly seemed to show that.

Today it appears that the market is entering a new phase.  Here is our update chart showing the share of the multi-unit income property market according to the type of financing:

Keep in mind that 2011 figures are Year-to-Date.  It appears that cash continues to dominate the market as the acquisition method of choice.  Interestingly, seller finance and FHA purchase have declined significantly while conventional purchases have seen an upswing after a long plunge.

What is also interesting to see is our transaction count:

We appear to have bottomed out in sales volume in 2009.  We are only half way through 2011 and at our current count we may top out near 90 sales or so.  That will be a significant increase from 2009 and 2010.  This is an important market signal.  To understand more about this signal, lets take a look inside some intriguing market dynamics:

This chart shows the $/SQFT of sales based on the terms of sale whether that be FHA, Conventional, Seller-Financing or Cash.  What we see are some pretty stunning trends:

1.  Is it any wonder that sales volume is dominated by cash when the $/SQFT is in free fall for this type of purchase?  Cash buyers can anticipate a giant 36% pricing advantage compared to conventional and seller-financed buyers!

2. The black box shows the recent data points that are bringing the average price on cash purchases down.  They range from $15/SQFT to $32/SQFT.  When replacement costs are $85/SQFT, why would anyone build anything right now?  Investors can put an additional $10-$20/SQFT in capital improvements into these properties and have brand new-like structures that cost much less than new construction.

3.  Notice that seller financing and conventional financing price points seem to lag  the direction of cash price points by a 9 to 12 month period.   However, notice that they are also much less volatile than cash prices.  That makes sense because they are using other people's money.  The price points are "sticky".

3.  Now lets talk about that important market signal. The sales volume signal is related to the overall decrease in price we have seen in all three financing categories.  We saw this same signal in 2003 when prices troughed in Weber County and sales volume accelerated.

In an exciting note, we may be witnessing the first signs of the multi-unit market turning the corner.  As sales volume increases, a floor will be established on pricing and we will build on value from there.  Sales volume increased for a full year in 2003 before prices began to increase in 2004.  We may still be 9 to 12 months out before we establish a bottom on pricing.  Nevertheless, this is interesting to watch and hopefully a sign that a market winter will give way to spring.

If I were a cash investor, I would be purchasing as much property as I could right now.