I took a few minutes to look around the Interwebs to see if I could find a consistent belief on where home prices are headed. While some people believe we are in an economic recovery and home prices will be heading up, it seems that just about the same amount of people think we have a ways to fall before we’ll see price stabilization. Yes, this paragraph basically negates itself, which seems to be the common theme amongst the various economists. There are just too many factors at play to make a strong prediction either way.
So, what are some of the factors that are playing in to this whole real estate fiasco?
Employment:
Obviously if we don’t have strong employment we can’t expect housing prices to stabilize and increase. If there is no one to buy the glut of houses that we have on the market, the prices can’t help but decrease further. Increased supply and reduced demand will almost always result in lower prices, regardless of the asset.
Interest Rates:
As you know, interest rates have been at all time lows for months and months. That’s been great news to people that qualify for loans (including me). I was able to refinance and save a significant amount of money by reducing my rate. This has also helped people afford more house. So, what happened during these times of low interest rates? Housing prices kept falling. With unemployment at very high rates, and a massive glut of bank owned homes either on the market, or soon to be on the market, there just has been much more supply than the market can absorb. If interest rates stay low, that may help stabilize home prices further, but if rates start rising, it’s a safe bet that housing prices will head south as the pool of buyers shrinks. Certainly there are areas of the country that are seeing prices hit bottom, but it’s anybody’s guess which areas have hit the final bottom.
Credit Availability:
Along with reasonable interest rates, there also needs to be enough available credit that more than just the “most qualified†borrowers can access it. The market was built up over the last decade with a pool of buyers that ranged from very qualified, with credit scores above 760 or so, and buyers with credit scores below that. Millions of houses were bought by subprime buyers that were able to access credit with very little proof of income (not that this was a good idea at all). All those extra buyers in the pool helped throw gasoline on an already hot real estate market and was a key driver in the overheated price appreciation that we all saw.
Inventory:
Right now there are millions of houses on the market across the country. The number of vacant, bank owned homes is staggering. There are clearly far more houses than there are buyers for them. The “average days on market†for a home these days is over 100 days depending on where you live. Until we see the average days on market come down and a significant shrinking of the total inventory, it’s safe to say we won’t have any sort of price appreciation and will continue to see downward pressure on prices.
Population:
As anyone in Detroit can tell you, population is a key piece of the real estate market. For areas with declining populations people shouldn’t expect to see anything other than downward pressure on prices. If there are shifts in industries, like there was in Michigan in the 80’s and 90’s, it’s incredibly difficult to keep the housing market hot. The fact of the matter is that you’ve got to have a sufficient population to drive demand for housing. This goes hand in hand with employment. Factors that affect the population are things like employment, crime rates, the weather and any other factor that contributes to people’s desire to live in an area.
I happen to live in an area that has fairly strong employment, quality of life and market desirability. Even so, we have experienced a large drop in prices, just as other areas of the country have, for many of the same reasons. My hope is that this area will bounce back quicker as some of the things above improve. Of course, I have no idea if that will happen or not at this point. I can only sit back and hope, just like everyone else.