It seems that the drumbeat of bad news will never end, with one poor economic report after another. It is hard to feel optimistic when all we hear are stories about the devastated real estate market, stock market averages at decade lows and unemployment rising. It’s enough to make you wonder if we will ever get out of this hole and back to a healthy economy.
With that said, I believe there are bright spots and great opportunities in our present market. First, all these calls for the real estate market to drop “another” 30 to 40% are completely out of whack with reality. For one, the real estate market is not monolithic market and these predictions fail to recognize that in 2008 there were some major markets that actually showed price appreciation. Of course when these so called “experts” claim that the market will fall “another 40%” they don’t admit that real estate only fell 18% since its peak, according to NAR. The Case-Shiller study showed a larger housing price decline of 27% from its peak, because it has a much narrower focus of only 20 major markets.
Many of the same dower predictions were made about real estate during the 1990 recession and S&L crisis that caused so many banks and thrifts to fail. The RTC was faced with $500 billion of real estate to be moved back into the private sector. I remember many of the prognosticators then claiming that real estate was dead for 10 years even some calls of 20 years of dead money. If memory serves me, real estate had rebounded from its free fall in 1990 to price appreciation by early 1993 then continued to appreciate throughout the decade that followed all in an environment of greater uncertainty, a far larger number of bank closings and much higher interest rates then we have today.
Today, interest rates are right around 5% for a 30 year fixed mortgage, real estate prices have fallen back to 2003 levels and housing affordability is at the highest it has been on record, nearly double the 2005 index level. The affordability index shows the cost of owning a home compared to income, the higher the number, the greater the number of people with average incomes can afford a home. The 2008 market correction also forced many of the speculators, who caused the market crash, to move on to the next day trade opportunity that the talking heads are clamoring about.
If we consider the 2005, 2006 and 2007 markets as a speculative aberration and not indicative of the true market, than real estate still holds great opportunity for those who make smart investments and look at their home as just that a home.
To put real estate prices in perspective, let’s smooth out he hyperbolic moves of the past few years and look at an average home in 2004 compared to an average price home today. If you were to sell your 2004 purchased home in today’s market at the same price as when you had bought it, you would still be way ahead. For example, the median home price in 2004 was approximately $190,000 compared to the 2009 median home price of approximately $180,000. Now add in the fact that you have lived in the home for 5 years, figuring a monthly “rent” savings of $1,500 that would add up to $90,000 for the 5 years. Granted there is some up keep, let’s say that is 50% of the monthly rent savings, we are still looking at a $45,000 savings. Add that to the 2008 median home price and you have made $30,000 above your 2004 purchase price. When the ROI is calculated with a mortgage, meaning that only 20% of the purchase price or $38,000 is invested then upon sale you will receive $78,000, basically doubling your money. That calculates to a 20% return on investment over the 5 years, try doing that with your stocks.
Real estate was never designed to be a buy and flip, it is a buy, hold and enjoy. Real estate bought as a home, using sound fundamentals and viewed as a long term investment will bring you a nice stable return and a place in which you live, raise a family and grow old with your loved ones. I know that the market news is horrible, but the opportunity to have a wonderful place to live and perhaps get some cash back at the end is very compelling to own your own home. There has not been a better time in our recent history to acquire a new home.