As I am sitting in the waiting room of my financial advisor
at Merrill Lynch, I always like reading the latest news and articles of the
Wall Street Journal, Harvard Business Review and Fortune Magazine. This month I chose Fortune. The headline of the entire magazine is where
I got the title for this article. Shawn
Tully writes a very good article talking about all aspects of real estate from
mortgage lending, new construction and foreclosures and what all of these
pieces not only mean to us as Realtors but what they mean to this market.
Tully starts off talking with a rancher from Texas he
knows. The rancher and home builder,
Mike Castleman, states “the talking heads of the world that are down on real estate
will hate to hear this, but America needs to build a lot more homes.” Castleman is the CEO and founder of
Metrostudy. His company analyzes real
estate data and new home inventory over the past 30 years. The key figures he collects are the number of
homes that are vacant and for sale in each city and the number of months it
takes to sell all of them. With all of
this information, his company can then tell if there is a shortage or surplus
of new housing.
In the 41 cities he studies, 78,000 homes are now either
vacant and for sale or under construction.
This is ¼ the number of 343,000 homes that were on the market at the
peak in 2006. If market conditions
change and normal consumer spending resumes, we will have a shortage. Castleman believes this is where we are
headed and soon.
Consumers are confused due to the over whelming amount of
ever contradicting news. One day it is
the best time to purchase real estate and the rates are at historic lows. The next day, you hear that the market went
down 500 points and real estate prices are falling. What do you believe? All of it has truth and relevance. The market, depending on where you live, is
the best time to buy to higher inventory levels and historically low prices. Plus with the mortgage rates as low as they are
now, it is cheaper to own than rent!
Karl Case from Case-Shiller Price indices agrees that the housing market
is recovering and is in his words “the little engine that could.”
To truly see where prices and real estate are headed is looking
at key fundamentals. The basic forces
that govern the market are the cost of renting versus owning and the level of
new construction. With this view we are
heading back to a new market view of an improving market. Prices have come down 30% nation wide and
harder hit areas saw 55% decrease in values.
The American dream declined and possibly was forgotten for many years
since the 2006 bubble burst. A return of
that dream will start to decrease inventory, start new home construction and
see a rise in pricing.
Mortgage money is available and credit standards are at
historic levels as well. Affordability
is also a large piece of the market and confidence returning. Mark Zandi, chief economist at Moody’s
Analytics, has found that homeowners now pay 9.8% of their income in after-tax,
tax and insurance payments toward the mortgage each month. That is down from the 17.2% it was in 2007. This is so low that he looked and found that
this is as low as 1999.
Another factor to look at is renting versus owning. In 28 of the 54 markets studied, it is now
cheaper to own then rent. Every market
is different and that is why Realtors are so important to help their buyers and
sellers understand what market they live in and what to expect in the current
climate. Add job growth to this equation
and then confidence will start to gain. If
renting is more expensive than owning, the market will start to creep up every
so slowly. Some markets will start to
see them move faster due to the shortage of existing homes and new
construction.
To wrap this up, there will be return to the market and we
are seeing those signs in areas around South Central WI. Once demand starts to increase, then other
sectors will need to ramp up to keep up with demand. This will naturally drive pricing up. In order to get a good price on a home,
Castleman’s advice is to “Beat the Crowd!”
