What's Next with Real Estate Values?
By Steve Gillman - 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
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
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.
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.
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.
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.
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.
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.
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.