Dear Kevin,
What’s going on with the housing market? Have we hit bottom in housing prices and when are things going to start looking better?
Bill in Goleta
Dear Bill,
Since none of us have a crystal ball we should turn to what housing history has shown, and come up with some reasonable assumptions about what’s likely to happen next.
As an investor for the past 20+ years, I’ve learned that stock, real estate, and other investment markets return to their long term trend lines. Despite bull markets, bear markets, shocks to the economy, or whatever forces drive the capital markets up or down, everything returns to the mean.
What does that mean in relation to real estate? If you were to guess real estate values went above their trend line during the last few years, you would be right. In fact, if residential real estate in general were to drop 25% from current prices, that would put it in line with the long-term trend line.
My experience is “return to the trend” has to happen. We’re either going to see prices come down fast and far, perhaps see prices drop more than 20% over the next year or so, putting us back to where we should be, or we’re going to see real estate prices remain static for several years, where inflation would eat up the excess pricing built into housing today.
Another reason to believe that housing prices will continue to decline is the lack of mortgage options. The subprime market for mortgages has all but completely disappeared. In other words, fewer people can qualify for loans. The simple law of supply and demand would dictate that with fewer buyers qualifying for home purchases, prices must come down.
Standard loans are becoming ever harder to come by, too, as banks are tightening lending standards. It will be some time, perhaps years, before lenders return to easier lending standards.
Next, we should consider demographics. The baby boomer generation is hitting retirement in steadily increasing numbers. Some would argue retirees will be purchasing new homes, perhaps in warmer climates. But does that mean they’ll own more than one home? Or will they sell one home to buy another, netting a zero increase in home ownership?
Finally, consider the stock market. Investors were excited in the late 90s when the market enjoyed a steady upswing. In March 2000 the S&P 500 closed slightly above 1500, way above its long-term trend line. Then, on October 9, 2002 it closed at 776 - a fall of more than 48% from the peak a price it had first passed in January of 1997. That means the stock market gains of 1997, 1998, and 1999 had all evaporated.
Why would other investments, including real estate, be any different? If, as I have observed, investments return to their long-term trend line, then the trick is to study your potential investment field and predict when things will start looking up.
So, should you buy real estate now? It depends. If you want a home for your family, can afford the payments, and aren’t too worried about short term swings in price, then perhaps yes. Historically, buying real estate has always been a solid investment. And as of this moment, fixed rates on mortgages remain low.
But if you are buying to speculate on the next move in the real estate market, I say tread cautiously.
Kevin Bourke is a registered principal with and offers securities through LPL Financial, Member FINRA/SIPC.
Comments
Kevin,
Thanks for the post. Being a Realtor here in Santa Barbara, I tend to field this question quite often. The reality is that no one truly knows where we will be in a year, 2 years or in 5 years. As your article points out, many people lean on past trends to try and predict where we are going. Others just on gut feelings.
As of right now, I can say that for the first time in 3 years, investors are starting to surface again and writing offers. This is part of what fueled the higher prices. Where this will lead I don't know. If for sure is not the same push as 2000-2004, but investors are out there.
In Goleta, the prices have really come down this last 12 months with many single family homes selling in the $650,000 to $750,000 range...these same homes were around the $875,000 to $925,000 price point only a few years ago. With that said, there are pockets of Santa Barbara where prices are not seeing to much of a pull back and the high end is for sure not seeing this ($3 Million and above).
I especially like your last point....if you are a family and can afford the payments and are not too phased by some price swings, now is a good time to buy. Also if you currently own and want to continue to be an owner, moving from your current home to another is also without too much risk...since you will be buying and selling in the same market. All things equal, both homes should see relatively the same movement (up or down).
Kevin Schmidtchen
www.santabarbararealestatevoice.com
kevinschmidtchen (anonymous profile)
February 22, 2008 at 8:45 a.m. (Suggest removal)
I disagree with Mr Schmidtchen's statement, "Also if you currently own and want to continue to be an owner, moving from your current home to another is also without too much risk...since you will be buying and selling in the same market." The reason is real estate taxes. As far as I know, how much real estate tax we pay in CA has a lot to do with the purchasing prices of our homes. Let's say, a guy named Joe bought a house 15 years ago for 200,000, so his tax would have been based on that price for all these years. Now suppose he sells the house for a million, and immediately buys another house for a million. So no losses at all, except for the agents' fees and closing costs, right? Wrong! Because his new real estate tax will be based on the price of one million rather than the original 200k!
Pessimist (anonymous profile)
March 11, 2008 at 4:05 a.m. (Suggest removal)
I agree with the point that was made about the rise in property taxes, but there is always a "what if" in every story.
Example: What if in the same scenario the home you buy you ended up getting a deal of $50,000 off of what you thought it was worth even in this market and then you knew of a buyer that loved your home and paid you "good market value" for your home...then this $50,000 washes away that theory and would pay for the property tax increase for 10-15 years.
No matter what....you are not going to cover every what if and many people these days are buying from a condo to a starter home, or from a starter home to a larger home if you will.
For many people, this is better than building because of the cost of building being so expensive. Then when all the permitting is done your taxes are also reassesed.
So I agree with the point that property taxes go up, but too many other factors come into play to simply say you disagree with my point made.
Respectfully Kevin
www.SantaBarbaraRealEstateVoice.com
kevinschmidtchen (anonymous profile)
March 28, 2008 at 12:29 p.m. (Suggest removal)