Taking a look at the real estate market over the past several decades, a cycle is emerging. Usually there is a steady increase in prices, the prices then peak; that is then followed by a relatively sharp decline which the results in a flattening of the market. The last time the market hit a peak was in 2006. Since then, prices in many areas have declined with a surplus of homes for sale.
If we take a page from the history books, it is likely that the next step is for the market to hit bottom. At some point, the market will begin the steady climb we have seen so many times before; but the question is when will that happen? Is it happening now?
You may be surprised to know that some economists believe that the market actually gives us subtle signals as to what it may do and where it may be going. We just need to look a little more closely at the ways in which the market is communicating those trends.
The following five factors may indicate that the market may be approaching its final descent. For sellers, that could mean that your patience may soon pay off. For buyers – this may be your best time to buy.
Fewer new homes are being built – In a September 15, 2011 white paper for the global investment management firm, GMO, titled “Between Errors of Optimism and Pessimism – Observations on the Real Estate Cycle in the United States and China,” financial commentator and consultant Edward Chancellor said that “at the bottom of the cycle, new construction comes to a virtual standstill”, which, according to federal statistics is now happening.
When fewer existing homes are selling, most home developers slow down or cease building new homes. To achieve a balance between supply and demand takes time before the market can turn around – which seems to be happening. In its September 20th report on new residential construction, the U.S. Census Bureau and Department of Housing and Urban Development reported privately-owned housing starts hit a three month low in August and were down 5% from the month before, down 5.8% from August 2010, and more than 25% from September 2006 when new housing construction may have hit its peak. At the same time, The National Association of Realtors reported existing home sales hit a five-month high in August and rose 7.7% from July 2011 and 18.6% from August 2010. That may be a sign of demand catching up with supply.
A growing demand for housing – It’s a simple fact of life – people need somewhere to live. Buyers may be wary of the process right now, but there is an entire section of the population who will undoubtedly consider buying in the near future. In an Inman News article released October 4, 2011 entitled “5 Signs a Real Estate Recovery Is Near” David Stevens, President and CEO of the Mortgage Bankers Association, reminds us that Generation Y (people born between 1977 and 1994) is estimated to include approximately 80 million people, or 25 percent of the U.S. population and those consumers “are now entering their prime time for starting their careers, their families, and for buying a home.”
Keep in mind that the U.S. Census Bureau predicts the country’s population to reach 423 million by 2050. That’s an increase of 112 million people in just 40 years. Those people will need housing and there will be an inevitable demand for homes to purchase. It stands to reason that this population growth will lead to fewer homes available for sale and prices will rise.
Rents are rising – Because more people are choosing to rent instead of buy in the present market, the cost of renting is rising. An article in USA Today titled “Rising Rents Make Houses Less Affordable” Zillow economist Stan Humphries noted that rents are expected to rise about 4% this year and that increase will continue in 2012. He attributes the price increases to the strong demand created by homeowners who have lost their homes to foreclosure.
High rental prices can be a good thing for the health of the over-all real estate market. The closer the average cost of renting comes to the average cost of owning, the more attractive it is to buy. In his GMO paper, Chancellor said; “Whilst people remain cautious of home-ownership, the first effect of rising demographic demand is felt in the rental markets as rents start to rise. In time, rising rents push up the prices of existing homes and spur new construction.”
Homes may be more affordable – Let’s face it, we’re seeing prices that we may never see again. The National Association of Realtors’ most recent Home Affordability Index finds the national median priced existing single-family home was $168,400 in August 2011, and the average interest rate was 4.69%. That’s compared to a median of $221,900 and a 6.58% average interest rate in 2006. Low housing prices are a key in sparking renewed interest in owning real estate and can be the launching pad for a recovery.
It can’t get much worse – Pessimism appears to be at an all-time high, and it seems just about the time experts believe things couldn’t get any worse – they start getting better.
In his GMO paper, Chancellor says “In the good times, a house is seen as a highly levered asset that only goes up. In the downturn, the same property is viewed as illiquid, expensive to maintain, and heavily taxed.” Maybe we should start thinking of bad news as good news – a sign that a turnaround may be right around the corner and that now may truly be the best time to buy.
So, as these signs point to the market approaching its trough, what does that mean for you? The prices you’re seeing now may be the lowest for many years to come. You may not want to make the mistake of waiting until we’re in another boom to make your move. If you’re thinking about buying or selling and would like to explore your options, please give me a call. I’d be happy to help.