Real Estate Marketing & Beyond
A recent survey of bank risk managers indicates that "Home prices are unlikely to recover before 2020 and mortgage defaults will persist for years..."
It seems that the bad news for housing is that prices won't go up much for years to come. But from a fundamental standpoint, this is exactly what the housing market needs. An opportunity to stabilize by finally becoming affordable for median income buyers. One of the primary reasons for the housing collapse was that housing prices grew so much that they became unaffordable for the borrower.
Sustainable housing needs lower prices © Cardaf - Fotolia.com
Another "fly in the ointment" is unemployment. Since 2008, job losses and reductions in working hours have eliminated or reduced the income of millions of homeowners and would-be home buyers. But an even bigger fundamental characteristic of the market is that the average income of the average home buyer has not been growing at a pace that could keep up with the increases in housing prices that took place between 1996 and 2006.
By 2006 growth in foreclosure activity was providing early warning signals that there was a problem. The "crack in the foundation" was affordability, or actually the lack of it. As the housing boom went on, Las Vegas, Atlanta, Phoenix, Miami, Seattle, and other major cities had seen huge growth in housing prices and property taxes, but little to no real growth in average income levels. Borrowers were borrowing to buy a house, then borrowing the "equity" in the home itself. When the cost got higher than the income, it was just a matter of time.
Given that real income levels have only grown around 10% since the 1970's, the fundamental issue is that housing prices can only be sustained at the income level for a given area. So, housing prices simply have to fall back to the average income level. The data show that we are there now, so, fundamentally, we are pretty much at "the bottom" of the housing market. In some areas, we'll see price growth, where incomes exist to support that growth, and in some areas where unemployment is most persistent, housing prices will continue a slow erosion until they become affordable for the local population.
While the real estate industry that earns commissions has solid motivation for wanting housing prices and loan amounts to rise, they simply can't rise faster than the local income levels will allow. It might be time to consider some "fee-based" brokerage models in real estate and lending.
From my point of view, the lower prices are good news, to the extent that this is what we must have to revive the housing market. As a licensed agent and real estate investor, I've lived both sides of the housing boom. I'd rather have stability instead of volatile boom and bust cycles.
The unemployment problem is a huge challenge, as it's a combination of productive jobs lost to other countries, and the increasing pace of change, which is making it difficult for older workers to keep up. Until this problem works through the system, a process likely to take years, we'll see limited growth in the demand for housing. Indeed, new household formation has declined significantly in recent years. You can try to spin that towards pent-up demand for housing in the near future, but it's more complicated than just the idea that loosening credit standards will suddenly unleash a flood of new home buyers.
I believe that all home buyers are real estate investors, because no one ever buys a home with the intention of losing money. And with prices this low, it's finally reasonable to believe that an investment in housing today is an investment that will pay off in the long run because mortgage payments are easier to pay and landlords can realize a positive cash flow.
We may see short term fluctuations, but if home prices fall much farther, it won't be due to the housing crisis, it will be caused by a weakened U.S. economy that is no longer producing a middle class with rising incomes.
I love agents and investers both and as an investor I find that prices will continue to change in the marketplace no matter what decade we are in. The very nature of capitalism is market growth and then market decline. If you don't like the swing then let someone else ride. If you really look around there is always some one getting rich and someone going broke. No matter what the whole market is doing. As an invester I can see that the down market is much easier to make money in but I don't decry either one. The biggest problem with our capitalism is not the growth and decline. It is the propensity for the fear of failier (to big to fail should not be in our system). Govt intervention mostly by fannie and freddie has allowed massive lending to go on (loans given out to people who should never have gotton one) as banks were able to sell notes to a place that had third party backing (i.e. the U.S. Govt.) Had these banks had to hang on to these mortgages or garentee them themselves after selling.. ..they never would have lent the money. Thus the home prices would not have risen so high thus it would not have out paced income. Your problem is not the agents not the investors and not even the banks. It is the vote collectors who have their thums in to many places they should not be. As an agent or investor try to sell a home at a higher value to someone who can not get a loan. Price does not matter because there is no sale. There is a famous saying that goes like this "when you see the croud running in one direction... ...start running the other way. Look up when the hiltons got there big realestate growth. Hint: Right after Dec 7, when everyone on the west coast thought war was comming to our shores and wanted to sell in a hurry. Thanks for your time and consideration... ...hope this helps.
P.s. By the way if it rents of $1000.00 I would not pay more than $70,000.00. My money is worth more than everybody else's!
Excellent points Joshua. From an investors point of view, I do agree. From the point of view of the "traditional" marketplace, housing will no longer be the economic engine it once was, for years to come.
The memories of $300,000 starter shacks in Las Vegas that could only be leased out for $1,100 a month... Great for Real Estate commissions... bad for investing.
I'll take the $100,000 homes that can be leased out for $1,000 a month any day of the week...
Here in our neck of the woods where over 40% of the current sales are cash buyers... that's true sustainability. Unlike the no down 100% financing buyers that made up 2005 and 2006... today's cash buyers are not going to be just walking away when they get a headache.
You are so right Paul. A $100,000 house that rents for $1000 a month is a return to what used to be a rental property standard - the 1% rule. Properties should rent for 1% of their purchase price. In the housing boom this rule was completely forgotten. We need to stop worrying about when prices are going to get back to where they were in 2006, and worry about how we're going to maintain an affordable balance.