Up-trending home prices are seen as a great sign by most people involved in real estate, because they instill a sense of comfort that, financially speaking, the market can return to the glory days prior to its collapse. But the sad truth is, there are more factors than home prices that affect real estate’s health, no matter how encouraging the rise may be.
Still, the trend doesn’t keep sellers and property owners from wishfully believing that they’ve regained some form of control as if the balance has shifted back toward their favor.
Unfortunately for them, the main reason for price increases has nothing to do with buyers eagerly purchasing new properties; rather, it hinges upon a more balanced proportion of supply and demand as fewer houses were built this year. Although predictions for 2013 include an increase in overall supply, the amount of new houses estimated for the upcoming year will still be way under the 2.5 million output of 2005.
This slow growth is good for the market’s recovery long-term, though. As more Americans secure employment – and those who are employed see increases in income – the time will soon be rife for increased home buying. Until then, those potential buyers are doing exactly what they should: establishing a firm financial foundation that will facilitate a home purchase. And that’s exactly what the market needs: serious buyers who have the financial means to avoid upside down mortgages.
Is real estate back in the hands of sellers? Absolutely not, but markets will see trends that seem to reflect otherwise. As vacancies fall for commercial properties into 2013, owners look to pad their profits by increasing rents. As such potential occupants should protect their bottom lines now by locking in lower rates with long-term occupancy plans. Private property owners and landlords, too, may try to capitalize off of increased property values, so renters beware.
Increasing monthly rent payments might just be enough to turn some renters into buyers as they look to invest in their own property. “There comes a point when you have to evaluate how much you’re wasting on rent and how much you could be putting into equity,” says Erika Snider, credit consultant for rent to own website, HomeStarSearch.com. He suggests that low interest rates, an abundance of available properties, and a wealth of leasing options make for a real estate atmosphere that is still largely in favor of consumers.
Take, for example, California, which is experiencing a gain in sales as homebuyers jump on historically low interest rates and reasonable prices. This is good for new homeowners, but for how long? Statistics show that 30% of current California homeowners are underwater on their mortgages and will affect the market as they decide whether to stick it out or to list their properties. And California is but a portion of the national picture; Zillow reports that 31.4% of U.S. homeowners are currently upside-down on their mortgages as the fed frantically scrambles for a way to help them out and boost the economy.
So while increasing home prices seems, on the surface, like a positive step, the real estate market is far from a full recovery. The upcoming year will see more increases in property values and low interest rates, but it will be far from a housing boom. It will be interesting to see if government-backed refinancing options – which aim to free up income for underwater mortgage holders – are the cure for a sluggish economy. Will homeowners take their excess funds straight into the marketplace or will they stash it away for the next financial doomsday? Stay tuned…
Jared Diamond is a real estate credit consultant with Amerifi Home Loans in Los Angeles CA. Outside his profession, Jared writes on a variety of personal-finance and real estate topics. Jared holds a B.A. in Economics from Ohio State University.