Even though I have been in the Gatlinburg area real estate business for the past 15 years and the investment management field for the previous 8, I have never been exactly certain of what causes a declining market to turn around and go back up. Sure, it requires there to be more buyers than there are sellers and you have to have a change in the market’s psychology but what causes this to occur? My question is not at all an idle one, as it has everything to do with when is the best time to purchase Smoky Mountain real estate here in our Gatlinburg/Pigeon Forge/Sevierville area. Because falling prices cause more “underwater” homeowners to consider walking away from their mortgage, forcing banks to place more properties on the market at giveaway prices, a vicious cycle is formed which leads to yet lower prices and the cycle continues. With the experience that we have gained during “the current unpleasantries” (the same term the South used to describe the American Civil War), I now believe I may have a better understanding of what is turning our market around.
The key is most certainly value. When values fall sufficiently, a few brave souls choose to purchase real estate despite all of the bad news and the negative market psychology. Why do they buy? Because values have reached such an extreme level that the case is too strong to not purchase. The best performing segment of our market is the entry level or first time homeowner properties. In Sevier County there are, as of today, only eight unsold 3 bedroom, 2 bath homes that are priced under $100,000. Why is there such a shortage? The answer is that in our market, a 3/2 residential property can generally rent for around $800/month depending upon location, condition, etc. My wife and I own several of these type properties and investors like ourselves are always looking for rentable houses. The value is created by the potential stream of income owners can receive.
Now that Gatlinburg area vacation rental properties are back down to prices at which rents can support their value, we should be near this bottom as well. I have been early in calling the bottom for our vacation rental market but I now finally see this market turning as well. Quite simply, if you have been waiting for prices to fall your patience is now being rewarded. Current prices are below the cost of production and building has pretty well stopped. As inventory is worked down, prices will begin to rise and people who are able (despite the challenges) to purchase at these attractive price levels will look very wise indeed. Ask yourself, what other real (tangible) asset beside real estate hasn’t already felt the impact of inflation? Gold and other precious metals are all sharply up over the past several years and the same is now true with commodity prices. Look at oil, gasoline, corn, cotton and other commodities markets and the run-up in value is truly profound. With the outlook for continued and possibly increasing inflation all but certain why shouldn’t real estate values also recover? I am very interested in your comments – Please share your thoughts with me whether you agree or disagree.