Buying and Selling a Home

What Will Drive a Real Estate Market Comeback

by Earl Lee
Earl Lee

How Did The Housing Bust Happen?
The seeds of this housing bust were sown during the preceding boom. Following the 2001 recession, a combination of tight housing markets and the lowest mortgage interest rates in nearly 40 years sparked rapid house price appreciation. Many buyers afraid of missing their chance to get in on rising prices, flocked to the market.”

“So despite rising mortgage interest rates, many buyers were able to chase home prices higher from 2004 to 2006 largely because of changes in lending practices. Lenders relaxed down payment and debt-to-income requirements, offered exotic products and, in many cases, lenders did not verify applicants’ incomes and assets.”

“Everyone was happy despite the fact that risks were mounting; loans remained solid as long as rising home prices allowed borrowers to refinance or sell their way out of a squeeze. But prices began to flatten at the end of 2006 as gravity took over and the rest is history. We all knew that home prices could not rise forever but it certainly lasted longer than we could have perceived.”

“Institutional investors quickly lost their appetite for mortgages and the securities they backed, sending the values of these investments down sharply. Amid fears about the strength of banks and severe losses of both housing and stock wealth, consumer confidence plunged 41% below its lowest previous trough. The American consumers slashed their spending and – for the first time on record – cut their net borrowing in 2008.”

“With that, the broader economy headed into a severe recession that accelerated with stunning speed. The resulting collapse of home prices placed another drag on the economy by dramatically reducing household wealth, which further discouraged consumers from spending.”

Housing Market On The Way Back
“Fast forward to today…With prices down by double digits, and interest rates moderating, there are reasons to believe that pent-up demand is building.”

“While deeply discounted prices on foreclosed properties have already helped to lift existing home sales in several states in 2009. Housing markets got an additional boost in the first quarter of 2009 when rates on 30-year fixed mortgages dipped below 5 percent and the first-time buyer tax credit kicked in.”

“So in my opinion we are at or near the bottom… generally speaking but there are still areas that will experience further declines.”

“In fact, IHS Global Insight, the research arm for PNC, says the nation’s housing market is now slightly undervalued. At the market’s peak, 137 of 330 metros were either extremely or significantly overvalued.

Buying and selling homes help turn the cogs of the American economy. The multiplier effect of the housing market has the possibility of expanding many other sagging areas of our economy.

“The NAR (National Association of Realtors) has issued this statistic: Each home sale at the median sale price adds more than $63,000 in economic impact. This includes payments for services rendered by sales professionals, home inspectors, attorneys, loan originators, movers and others, as well as remodeling, new furnishings and other multiplying factors.”

“During my years in real estate I’ve seen tough times like this before – in 70s, the 80s, and in the 1990s.”

1982 Economy Was Worse
Unemployment topped 12%. Interest rates were through the roof, but guess what? People were still buying homes.” “Perhaps the biggest difference between now and the early ‘80’s is the onslaught of negative information constantly sapping the confidence of the market. Making this as much of a ‘fear session’ as it is a recession.” “Back then, very few people had cell phones – and if they did they were the size of a small suitcase!” “We only had three TV networks and the news was only available at 6:00 and 10:00 each day. Of course, there was no cable TV or YouTube to replay things over and over…”

“The internet was used only by the military and email was non-existent.” “In other words, we weren’t bombarded with bad news – everywhere we turned – 24/7.

We had a chance to step back, reflect, think and put things in perspective. Not today.” “Back in ’82 we also said that if rates ever got down to 15% we could sell a lot of real estate. Today rates are around 5%.” “Well, we’re staring down yet another cycle and, yes, our business is a cyclical business.

It’s just that since our last up cycle lasted over 11 years… some of us simply forgot that real estate is a cyclical business. Perhaps we should have known that given the length of the last up cycle it shouldn’t have come as a surprise that the downturn would be more significant then we could have imagined.”

House Is Not An ATM
“Somewhere along the line many consumers lost sight of the fact that a home is a home, and not an automated teller machine that allows you to withdraw more than you could ever pay back.”

“A recent Federal Reserve report estimates that of the trillions of dollars in real home equity cashed out between 2001 and 2007, homeowners used $874 billion to pay off non-mortgage debt – in effect rolling consumer debt into their home loans.”

“Housing affordability is near the highest it’s been in the 40 years they’ve been tracking this measurement…interest rates are still near historic lows, and home prices are within reach of many more Americans.”

“Nearly half of all today’s buyers are first timers, says NAR.” That’s up about 15% historically.

So What’s The Future of Home Ownership in General?
“The longer-term outlook is also promising. The record size of the echo-boom generation now reaching young adulthood should help keep household growth at least on par with 1995-2005 levels even if immigration slows dramatically from its peak pace in the first half of this decade.”

“Longer term, I think inflation is going to come back into play, which would support firming home values. World economies are growing and demand for natural resources will grow along with them. Costs, as we know them will rise, including the cost of housing.”

“Over time, the combination of pent-up demand from deferred household formation and low levels of home building will reduce the excess vacant inventory, bring markets back into balance, and send housing starts up sharply from early 2009 levels. If history is any guide, housing markets will rebound in advance of labor markets and help to spark the economic recovery.”

“Rapid growth in the population under age 45 and over age 65, as well as the rising minority share, will shift the composition of housing demand over the next 20 years. These changes in the age distribution will mean greater demand for both starter homes and rentals, and for seniors housing.

The first wave of change will occur in the inner suburbs of large metropolitan areas where people now in their 70s and 80s are concentrated, then fan out to the outer suburbs as the baby boomers start to downsize.”

“Indeed, home ownership is vital. It will continue for most Americans as the single most important – and most significant – financial decision of their lives.”

“When the housing market does rebound, demographic forces should restore annual housing production to at least the levels seen in the late 1990s and early 2000s.”

Print Date: 9/21/2020
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