Housing Outlook: Real Estate Reality

By Bob O'Brien

With the latest National Association of Realtors report being less than spectacular (median home prices down 14%), and the economy starting to show signs that a bottom may be nearing in the later part of 2009, will real estate actually start appreciating in the near future? Probably not!

The drops in Real Estate have been unmatched since the Great Depression, and foreclosures are at all time highs historically. Real Estate sales have picked up, and inventories are starting to move a little better, but what does this really mean for the #1 investment of most Americans?

It may easily be 10 years or more until we see Real Estate appreciate from its Highs!

First of all, prices are still dropping, and remember if you think this is crazy, many people thought it would have been crazy to say back in the late nineties that the stock market will be no higher in 10 years from now.

Here is why it will take so long for Real Estate prices to appreciate again.

Sluggish Economy. With unemployment still rising and people concerned about their jobs, it will be years before a lot of people feel comfortable with a huge purchase. People’s confidence has been shaken for a while, and their view of homeownership will become more in line with financial realities.

Higher Interest Rates. This is what will really keep the Real Estate prices suppressed for years, even years after the market hits bottom. As the Government continues to provide stimulus and print money, which is certain to lead to heavy inflation, interest rates will rise.

As rates rise and 30 year mortgages (rates) moves higher, even with the solid demand for real estate, prices will stagnate due to the affordability issues that go along with higher rates.

A jump in mortgage rates of 2 1/2 % will increase the payments in a $200,000.00 mortgage by over 30%. We may easily see a 10% interest rate on the 30 year mortgage 5 years from now, which would increase payments on a $200,000.00 mortgage by over 60%.

With more heavily regulated lending standards, higher rates will make real estate less affordable and therefore keep prices level.

This was a Big Bubble. It still amazes me the run up in prices that we saw in just a short 5 year period, in an economy that may have seemed OK on the surface, but was in really poor health when you popped the hood! There were many big US Cities that increased in value over 150% in just about a 5 year period.

Original article

Comments

[Dave Wrixon:]

Except that the US government doesn't want to control inflation too badly. Its monetary intervention will always be a day late and a dollar short.

May 17 06:11 AM

[Sean in CA:]

Mark my words: 2005 prices* will NEVER even come close to being approached again.

*excluding S.F. Bay Area, NYC Metro and Shawnee, Oklahoma.

May 17 11:16 AM

[henarl:]

Well Sean, "NEVER" is a hell of a long time. The dollar lost about 95% of it's value in the last 90 years and if that repeats, a house costing 200,000 U.S. dollars now will be about 4,000,000 of them by the end of this century. That being said, you could grow old in your current home waiting for it to return to it's value of 2005, adjusted for inflation.

May 17 02:31 PM

[Douglas T:]

For what it's worth Global Real Estate mutual funds have been among the best performing sectors for the last month or so. www.mutualfundwealth.com/

May 17 03:18 PM

[76423:]

If you believe (as I do) that the government printing presses will lead to higher interest rates, then shouldn't we all agree that 3/1 ARMs, 5/1 ARMs, 5/1 ARMs Interest Only, and 7/1 and 10/1 ARMs are also all 'teaser rates'? While a 30 year fixed may be 1% or more higher than the Administration's teaser rates of 4.75%, it will make you sleep better at nights knowing you're not going to be whipsawed for the next 30 years. If you can't afford the 30-year fixed, then DON'T buy the house.

May 17 08:16 PM

[markg:]

"That being said, you could grow old in your current home waiting for it to return to it's value of 2005, adjusted for inflation."

The inflation part is key to the government's plan to prop up house prices. Ponder this; the Fed keeps rates low, which makes it cheaper to borrow, and also helps rate reset's from going ballistic. What does this do? It makes it much easier for people with ARM's to stay in their houses. Add inflation to the mix to give people incentive to stay in their houses as an apprciating asset. This is the only way the govenment can hope to stabilize the RE market. It's also very consistent with them currently running the presses full speed.

May 18 02:20 PM

[Crashnburn:]

Personal Experience. In 2003, I refinanced from a fixed 6-1/8 to a 5/1 4-3/8. In 2006, I got scared of the run-up in interest rates, so we refinance to a 6-1/4, 30 year fixed. As it turns out, we would have been fine not refinancing then. We closed last week on our re-fi to 4.875, 30 year fixed. We had to pay an extra 6K to bring the mortgage to 417K, but getting the lower rate was worth it. I don't see us ever fe-financing this home again, as I don't see rates going low enough to make refinancing again, ever.

May 18 02:52 PM

[perceptions...:]

We may well have already seen EFFECTIVE highs (inflation adjusted), for both the Real Estate & Share markets, in our lifetime.

There are a number of substantial, structural factors lining up, which will place a return to the old Growth & Profit regime are great risk, including:
1) Population - Baby Boomer Aging/Retirement/Death & Total Population growth reductions, over the next 20-30 years.
2) Peak Oil - We are already on Hubbert's slippery downslope, with no replacement in sight for the many applications/usages of Oil, including Transport, Chemicals & many others.
3) Climate Change - Like many areas of modern life, we have done things without fully understanding where they will lead us. Now, as Major tipping points in the Global Climate become more apparent, there is a push under way, to undo what we have done.


On May 17 02:31 PM henarl wrote:

> Well Sean, "NEVER" is a hell of a long time. The dollar lost about
> 95% of it's value in the last 90 years and if that repeats, a house
> costing 200,000 U.S. dollars now will be about 4,000,000 of them
> by the end of this century. That being said, you could grow old
> in your current home waiting for it to return to it's value of 2005,
> adjusted for inflation.

May 18 09:49 PM