This seems to be the question I get from my friends-at parties, dinners and relatives. “Dave, when do you think the real estate market will hit bottom?”
That’s the big question these days, and I’m not sure that anyone has a definitive answer to it. Some of the greatest minds in this sector of the economy are arguing time frames and dollar values with conflicting outcomes, reflecting large deltas in thought and opinion.
People posing these questions to me fall into one of two camps: camp one, “local and personal,” and camp two, “national and economic.” I try to assess the questions and determine what camp the curiosity is originating from prior to offering insight. I do this because I feel strongly that these issues cannot be defined on a national basis and can only truly be looked at on a local basis when determining “what should I do to position myself best in today’s real estate market?” I agree there is a national impact due to so many MSAs (Metropolitan Statistical Areas) reflecting slower real estate appreciation or even real estate depreciation; however, it would be a mistake for homeowners and potential homebuyers to take a “national statistic” into consideration when making a decision as to when to sell or buy a property.
Turn to any media outlet, and you will see that they have all jumped on the bandwagon to share opinion and innuendo that is based on “national statistics.” I have heard a number of comments and reported stories that flat out were not accurate as it relates to many parts of the country on a localized basis. Yes, there are areas that are bad; however, there are areas and “Micropolitan Statistical Area” neighborhoods, hundreds of them in fact, that are showing strong stability and continued appreciation rates. The public should deploy common sense when assessing how a specific media report reflects on their specific MSA-Micro or Metro.
The public must be careful not to take all of what is portrayed in the media as fact. The media is known to focus on negative aspects and the resulting fear does create viewers, not a new concept. The negative media has been the proverbial “fuel on the fire” and has pumped additional fear and sentiment into the real estate markets. The psychological aspects of the negative press have added additional drag on many parts of the nation’s real estate markets.
Let’s examine this for a minute on a worst-case basis. I believe I’ve heard that supposedly 2.5 million homes will go into foreclosure due to Exotic ARM products, sub-prime lending, and a bucket of other reasons over the next two years. In our national real estate market, with over sixty-million homes that hold a mortgage, the 2.5 of 60 represents 4% of the entire market. If 4% of the mortgages currently in existence went into foreclosure, due to aggressive lending and adjusting ARM products, 96 % of these mortgages will still continue to perform in accordance with the borrower’s legal responsibility and mature properly. I agree that an increase of 4% into the supply of homes on the market will continue to burden some markets, but it is not enough to suggest that there is a real estate bubble that is about to pop. It is inevitable not to see reduced home prices caused by real forces that need to be worked out over the next year, but the negative sentiment inflicted on the nation is certainly not helping matters.
Also, that foreclosure figure of 2.5 million very well could be way over-inflated. It is speculative at best as to which mortgages are at risk and which ones are not. This number includes a rather large group of homeowners that possess the resources and abilities to perform on their mortgages regardless of the current or changing payment structure. Many borrowers will negotiate “work-outs/Note modifications” with their current lenders to ensure that they can stay in the home. Other borrowers simply have the ability to perform on the new payment and planned on it all along. In addition, many of the borrowers who obtained sub-prime or Alt “A” financing have demonstrated their ability to credit or income-qualify and will utilize that strength to refinance their existing exotic mortgage vehicle. I would argue that over 35% of the media portrayed numbers will not actually turn into foreclosures and put additional supply into the market.
At the end of the day it is important that I offer the best advice I can to my colleagues, friends and relatives. I try to focus on their local MSA and deploy knowledge that I have in that specific climate. I recently heard it said by the chief economist of the National Association of Realtors (Lawrence Yun), and I agreed in laughter at the exactness of the comment, that trying to predict the real estate market, on a national basis, in one single model with one single outcome was like trying to predict the weather for the entire nation within one single forecast-it’s just not possible. I’ve talked with friends in Michigan about the troubles they have encountered due to the massively struggling auto industry. I have also talked with friends in New Orleans about what they micro-climates have witnessed due to Katrina (both totally unrelated to aggressive lending practices or Exotic ARM Products adjusting) although these factors have not been any help to these hardest hit communities. However, I have also spoken with friends here in Utah that are still witnessing great appreciation in various neighborhoods and will end 07 with more than a 12% gain statewide. There are parts of California and areas in New England that can boast the same numbers. What’s interesting is that it gets much more neighborhood-specific due in part to individuals that have a desire to live in a specific part of town.
There are also macro forces that are at work in our economy-inflation is not going away. Yes, there are ups and downs, but by any measurable means real estate values have always gone up and down, but on an overall up-trend. Just ask Dad or Mom or even Grandpa and Grandma how much they paid for their home “back in the day.” I assure you it is much less than what you paid or will pay for your home. I heard it said once that if you took all of the land on the planet that was not covered by oceans, divided it by the number of humans on the planet, each person would get just over 7 acres. That seems like a surprisingly small amount of land for such a large amount of space. But many parts of the world will never be fit for human habitation. Our population is growing at break-neck speed and is not headed the other way. With that in mind, simple forces of supply and demand come into play to suggest that real estate values, even with “corrections,” over an extended period of time will show positive appreciation.
I want to add an observation in “homeownership motivation.” There have been many mortgages written over the last few years for borrowers that could not qualify in a traditional matter-income, asset, and credit respectively (the 4 C’s of finance being deployed). These same borrowers, many of them anyway, are a part of the group that the media and economist are predicting huge increases in foreclosures from. What the number crunchers are not sharing in their reports is the borrower’s motivation to continue being a “homeowner,” which is currently very high in the United States. Many homeowners that cannot refinance also realize that the same reduction on mortgage products that are hindering their ability to refinance would also hinder their ability to buy a new home if they sold their home or gave it up to the bank. Many homeowners with families do not want to live in a rental home or an apartment and have great motivation to perform on their mortgages that are in place. It may be years, or never, that products that aggressive will come into play again and many people feel happy that they got into their exotic mortgage just at the nick of time. This sentiment suggests that many homeowners will find ways to perform on their mortgage or communicate aggressively with their current lender to construct “work outs” to ensure they can continue to enjoy homeownership.
There is one final piece of information that needs to be observed by MSA and that is simply the “affordability factor.” If there is an individual that is motivated to become a homeowner, the stars just need to line up in cost, rate, and payment to make it a viable possibility, regardless of market sentiment in the actual MSA. If someone has their eye on a home, or homes, for sale and at some point the price and payments are low enough (due to finance terms and lower interest rates), they will strike while the iron is hot. Opportunity doesn’t knock so often in our real estate market, and it will be a wise person that educates themselves on an unprecedented opportunity to seize their shot at homeownership within a price and payment that they can afford. In specific MSA’s many of these opportunities are opening up minute-by-minute, and it’s just a matter of time before the market heats up and swings the other way.
So where’s the bottom you ask? I would first need to ask you a series of questions to even come close to guessing at the answer-and your market may already be headed up. It is key to look to your local market, and even your actual neighborhood. Property values go up and down all the time. Yes, we have seen more markets with slower appreciation or even depreciation due to many factors.
And while I can’t quite say where the bottom is, I can share one prediction that will continue to ring true in America’s free market and that is the fact that in the future there will always be a new low that is far above our latest and current high. The bubble will not burst-it will only retract then grow as demand continues due to a factor of supply and demand from an ever growing population. Look to your local MSA, metro and micro. There are many answers already being provided and many areas have already witnessed great price stability. If you or a friend is looking into buying a new home, the next 4 to 8 months will provide some excellent opportunities in both price and rate in some areas of the country-and I would recommend that you do not pass them up!