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What's Next with Real Estate Values?

By - 2009

Where are real estate values headed now? I am writing this in the summer of 2009, and although home prices appear to be falling still, June statistics showed the first minor increase in three years (nationally). It could just be a blip up in a downtrend, of course, but not even the most pessimistic analysts think prices can keep dropping for too many years more. What next then?

A difficult question at best. During the "bubble years" it was easy to see that a fall was coming if you paid attention. I wrote in 2006 (in an ebook I published), "By the time you read this prices of homes are likely going down." Good timing, but notice that I said "likely." Though it was easy to see than houses were over-valued and that prices had been rising at unsustainable rates, predicting the precise timing of corrections is not a science nor even a perfectable art.

Now, we know prices will start to rise again at some point, but predicting the timing is just as difficult now. For clues, though, we can look at the factors that affect real estate values. As these change we might be able to see the bottom - and the appreciation that follows - coming.

Foreclosure Rate

A key factor is the rate of foreclosures which so far it just keeps climbing higher. When lenders take back those houses, they can't sit on them - at least the banks can't. Selling quickly is necessary due to regulations regarding their capital requirements. Selling fast means they sell cheap, which tends to drive down prices for all homes (in the area where there are foreclosures) to some extent. Look for the rate of foreclosures to decline before prices can stabilize or start going up again.

Housing Supply

The supply of houses out there is another important factor. At the height of the housing boom many of the homes bought were purchased as second homes and speculative investments. There is likely to be more selling of second homes than buying now that the economy is in a slump. This suggests that there may be too many homes available still, which holds down prices or sends them even lower. But with new housing starts down, a growing population will use up that excess supply quickly right? Maybe... but read the next item.

Population Growth

The growth rate of the population is always an important factor in demand for housing - and therefore prices. Not many people understand how much demand for housing was created during the boom years by immigrants, illegal and legal. In fact, many illegal immigrants were able to get home mortgages, which has become more difficult now. As renters they created demand for houses as well. However, with the worsening economy, many who are here illegally are returning to their home countries. Fewer are trying to come here too. This could negatively impact demand for years. Someday a return to higher levels of immigration (legal or not) may help stabilize real estate values or push them higher.

Unemployment

Our still-rising unemployment rate is another factor of course. More unemployment means fewer people able to buy a house, and more unable to pay the mortgage on the one that they already bought. Watch for a rise in employment levels. That could help real estate values to rise due to increasing demand and ability to make those mortgage payments.

Interest Rates

Mortgage interest rates are a potentially huge factor. They are the "wild card" in the whole equation. For example, if they were to go from the current 5% to 9%, tens of millions of people who now qualify for an average mortgage loan would no longer be able to buy a house - at least in the price range where they would normally search. This would mean a dampening effect on any real estate recovery, and could even push prices down further. How high will rates will rise in the near future? Who knows, but the massive government borrowing going on will have to push them higher at some point.

Inflation

Money is being created by the government (actually by the Federal Reserve) at a faster rate than ever. This is balanced at the moment by the collapsing economy, but at some point it will likely be inflationary. In fact,it has been projected that the borrowing needs of the U.S. government over the coming year cannot possibly be funded without the FED printing more money to buy those bonds. When the effects of this monetary inflation hit, it may help boost home prices along with wages and the prices of everything else.

Watch the factors outlined above. When and if they change in the right direction real estate values should start to stabilize and hopefully start to rise a little bit. In the meantime, look at the current slump as a big sale, with homes selling for a 50% discount in some areas.


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Houses Under Fifty Thousand | What's Next with Real Estate Values?