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Monday, August 29, 2011
Understanding Today’s Real Estate Market to Decide What Comes Next
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Probably one of the most frequently asked questions asked to real estate agents these days is “when is the housing market going to recover?” Chances are the people asking this question most are homeowners waiting to sell their property and yield what they would call a reasonable return on their investment. But with the way things have been going for a few years now, there is no telling when the market could recover unless you understand what it took to get here and how the process of boom and bust and boom again works.
In this article, we cover a few important things that will help illustrate how we got to where we are today in the real estate market, what to expect in general and also what sellers should expect so they understand which approach they would like to take with their home at this time.
Post Boom Crash Responsible for Slow Recovery
In the early 2000s, we experienced the biggest global housing bubble ever in recent history, during which home prices jumped to about 100% of then current values, in most markets. This lasted until 2005, when all of sudden the market crashed.
To understand what lies ahead, we need to understand what happened leading to the housing bubble mentioned above. Consider this: In the 1920s when the US experienced an unprecedented stock market bubble, prices jumped very high and too quickly. Similarly, in the 1990s, when the dotcom phenomenon was making history, no one could have known what to expect when the bubble burst in 2000 – forcing the NASDAQ to plummet over the next two and a half years, losing 76% of its value. Flash forward to today and we know that though it is eleven years after the NASDAQ debacle, it still has not come even close to its original (and very high) ceiling value. The housing market we are seeing today is experiencing the same phenomenon.
Supply and Demand – Basic Econ Finds Its Way Into Millions of Homes
We are definitely seeing a huge downward pressure on the housing market and that downward pressure is going to go further down before it comes back up again. A look at our supply and demand trends illustrates the confines of our economy very effectively. At the present time, there are far more houses on the market than ideal for a recovery to begin. The average inventory (supply of newly built homes for sale) is about seven months – which means that it would take that much time for all houses on hand to sell. At this point it would take an additional eight months or so to sell all existing homes that are on the market.
Ordinarily, a stable market would indicate about six months to sell all homes in inventory, indicating neither a buyers or sellers market. But when you factor in the recent robo-signing scandal that happened ending up in a moratorium on foreclosures last year, we can expect a string of foreclosures as a result.
Home Prices Still Not Ideal
As we have seen recently, the global economy heavily impacts the US and the very first indication in terms of real estate is on interest rates. As we witness fewer government concessions, tax credits and loan guarantees that make buying easier, we will see interest rates continue to rise and home prices fall.
Industry analysts cannot precisely predict when there will be a showdown but an end to this uphill battle will definitely come. Some are saying it will happen sometime next year – but even then, there is no telling how long the market will take to recover. And just like the NASDAQ has yet to fully recover to its post-dotcom boom status, the housing market will likely move up very slowly once recovery begins.
Home Sellers – Selling Out of Necessity or to Move Up?
What this means to homeowners who need to sell their homes and have no choice, is that they should get their homes listed as soon as possible, before interest rates rise and housing prices fall even more. If at all possible, hold out and sell your home when things stabilize. There is definitely more to come before we hit rock bottom and begin to recover.
If you are looking to move up into a better home, then this is a good time to sell. Keep in mind that in the mid-2000s when homes were selling at much higher prices, that translated to a higher priced purchase too when homeowners moved up into a bigger home. But in today’s market, you are essentially trading dollars for dollars and at a relatively low borrowing cost.