The media has given plenty of negative attention to the housing market in 2007. There is no doubt that the market is undergoing a correction, but it’s more important than ever for buyers to be able to understand the factors that go into purchasing a home. It is actually a GREAT time to purchase a home if you have good credit! I hope that this information will help home buyers determine the facts of the real estate market objectively.
Housing inventory is higher than average….but that means good things for the home buyer!
A MARKET CORRECTION: The housing market is undergoing a natural cyclical correction. It’s impossible to ignore the ongoing news surrounding the downturn of the housing cycle. The recent “housing boom,” which lasted from 2001 to 2005, was caused by low interest rates and a rapid increase in property valuations, resulting in high numbers of renters opting to buy. Three factors caused this decade’s housing boom to spiral upward:
1) A run-up in home-price valuations that spurred a high sense of urgency in home buying and selling.
2) Poor lending practices, which caused many home buyers to secure loans that they ultimately couldn’t afford over the long term.
3) Speculative purchases of homes also increased, with buyers investing in real estate with the hope of a quick return on investment.
The housing market is correcting after a number of years of unwise purchasing, but a correction in the housing market doesn’t equate to a crash. Unfortunately, the ongoing negative news about the troubled areas in the U.S. has caused a ripple effect, with home buyers and sellers on a national level exercising caution before making a decision. This has caused an overall slowdown in the marketplace.
The National Association of Realtors’ chief economist, Lawrence Yun, projects that nationally, the “median existing-home price will drop about 1.7% this year. This is a small, minor adjustment after a strong run-up in housing prices.”
It is true that the number of homes sold in 2007 will have dropped from the year before, but 2007 is still among the highest years on record, with numbers of sales for both 2007 and 2008 projected to be even higher than the levels seen in 2002.
Since homes are taking longer to sell, the number of homes on the market has grown. In some markets around the country, it is taking much longer than the typical 11 months that is the national average right now and so in those markets, there is a large number of homes on the market. That is good news for buyers!
In the Pacific Northwest, where the inventory of homes on the market ranges from seven to 10.5 months as of November 2007, this equates to good news for buyers who have more homes at more price ranges from which to choose.
Mortgage rates are still near record lows!
Home buyers get more house for the money in part because mortgage rates are low.
With the 30-year fixed rate hovering between 6-7%-a 45-year low-qualified buyers continue to have access to incredibly low interest rates. This means that although housing prices have risen, monthly mortgage payments remain reasonable for those who look at real estate as a long-term investment. For example, today if a buyer secured a 6.5% interest rate on a 30-year fixed loan for a $300,000 home (with no money down), the monthly mortgage payment would be $1,896.20. In 1991, the same monthly mortgage payment would have bought a house worth only $230,492 when mortgage rates were 9.25%. In 1982, when the 30-year fixed rate was 14.6%, the same payment would have bought a house worth only $151,657.
Foreclosures are higher than normal – it’s a consequence of overbuilding and the high prices and buying frenzy of the past few years.
There have been a few states that seem to be the center of attention regarding foreclosures. These are the states, like California, Nevada, Florida and Arizona that have experienced an abundance of new housing, a rise in investment properties and a rise in prices that was high above the national average.
Now that home prices are starting to drop and stabilize, the areas that went through a building frenzy and experienced the largest price increases are suffering a heavy devaluation in home prices, which in turn has caused homeowners to foreclose on loans.
Borrowers who do not have good credit have had some problems, but keep things in perspective.
With the availability of credit over the past years, many folks have over-extended themselves and have delinquent loans or a past history of bankruptcy or have low credit scores. But, again, unlike the media’s portrayal, the reality is that subprime loans comprise only 9% of total loans nationwide and of those 9%, less than 11% of those subprime ARM and fixed borrowers have defaulted on their loans. loans.
Real Estate has appreciated in value over the long term.
Over the long-term, real estate has always appreciated in value.
Real estate has always been one of the most solid investments in the U.S, because, after all, people always need a place to live. Real estate has less volatility than the stock market and over the historical long-term it remains a guaranteed return-on-investment. Take this example from NAR’s Yun: If a buyer were to put down $10,000 for a down payment on a “typically priced home in the United States at a typical appreciation rate of 5%…(he/she) would see a return of $110,300 after 10 years. The same $10,000 invested in the stock market appreciating 10% annually will result in $23,600.”
As history has shown, for those who choose to keep their home for six to 10 years (and not flip for a quick profit) real estate investments do pay off, and pay off well. In fact, what we’re seeing now is a repeat of a housing cycle we’ve seen before. In the early 1980s and 1990s, some areas of the country experienced the worst downturn they had seen in the last 25 years, which were caused by localized economic weaknesses and loss of jobs while on a nationwide average, others were barely affected at all. But even those areas that were hit the hardest in the past experienced a historic uptick in prices, and then a continuing long-term appreciation.
Excerpted from a January 2008 Report from John L. Scott Real Estate