The latest report from the National Association of Realtors reveals that residential real estate prices are more affordable than they’ve been in almost a decade.
The median price for existing homes fell by 5% year-over-year and now stands at just $163,700.
Score one for homebuyers.
In addition, money is cheap. Mortgage rates fell for the fourth week, with a 30-year fixed-rate loan hitting a yearly low of 4.63%, according to Freddie Mac (FMCC.OB).
Score two for homebuyers.
These two factors alone – depressed prices and cheap money – normally lead to rampant speculation.
But we’re not living in normal times. And if you’re tempted to jump back into the housing market now, you need to get your head checked first.
The truth is, the real estate market is overrun with terrible fundamentals. And I’ve compiled 12 stats to prove it. I’ll share the first six with you today and the next six tomorrow.
And just so you don’t kill the messenger, I’ll also provide some ideas on how you can profit from – or at the very least, reduce the pain of – further price declines.
So let’s get to it…
Hope isn’t Enough to Eliminate Excess Supplies
On the supply side of the equation, there’s so much housing inventory that no silver bullet solution exists.
The only answer to absorb it? The passage of time – lots of time. Consider…
Supply Glut #1: Existing Homes
At the end of April, there were 3.87 million previously owned homes for sale. That represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March.
Supply Glut #2: Foreclosures
There are currently 2.25 million homes in the foreclosure process. That’s equal to an extra 5.3-month supply, based on the current sales rate.
Supply Glut #3: Shadow Inventory
There are currently 1.8 million homes in shadow inventory, according to CoreLogic. Shadow inventory includes homes that are seriously delinquent (i.e. at least 90 days past due), homes that are in some stage of the foreclosure process and homes that banks have already repossessed, but haven’t put back on the market for sale. That’s equal to an extra 4.3-month supply, based on the current sales rate.
Add it all up and we’re looking at about 18.8 months worth of supply that needs to be worked off.
And that, folks, is where basic economics applies.
That much excess supply is bound to lead to lower prices. All the government subsidies, home affordability programs, or cheap money in the world can’t overcome that fundamental principle.
So how about the demand side?
Even If We Give Homes Away, Demand Won’t Perk Up
Sadly, demand conditions aren’t too rosy, either. Consider:
Demand Destroyer #1: Underemployed and Underpaid
With unemployment resting at 9% and wage growth stagnant (up just 0.1% in March), millions of consumers can’t afford to buy a new home. Not to mention the fact that tighter credit restrictions are also severely limiting the pool of potential buyers.
Demand Destroyer #2. Consumers Not in the Mood
Even if consumers could afford to buy a home, they’re not in the buying mood. The latest National Housing Survey from Fannie Mae (FNMA.OB) reveals that 36% of Americans believe buying a home is risky nowadays. By comparison, only 17% thought so back in December 2003.
As Anthony Sanders, a professor of finance and real estate at George Mason University, says, “Risk is always a bad thing for the housing market.” Simply put, consumers buy when they’re confident, not afraid. And they’re clearly afraid now.
Demand Destroyer #3: Prisoners in Our Own Homes
Even if Americans wanted to buy a new home – and could afford it – they can’t. Not without coughing up a serious amount of cash at closing. Why? Because an estimated 11.1 million homeowners are sitting on negative equity. And close to five million are sitting on more than 25% negative equity, according to CoreLogic.
It’s All About the Fundamentals
The fundamentals don’t add up to an imminent rebound in real estate prices. On the contrary, in fact. Excess supply and historically weak demand point to nothing but lower prices ahead.
I know that’s a tough pill to swallow, given that real estate prices are already off 29.5% from the peak in June of 2006. But it’s true.
In my next post, I’ll provide six more stats to convince you once and for all. And then I’ll share some ideas on how you can actually fight back against the declines. So stay tuned.