Yesterday, Ben Bernanke, Fed Chaiman, announced while taking questions after a speech that the recession was over. Although unemployment levels are alarmingly high, his stance was that on most technical levels, the recession has ended, but that it would be a long painful recovery, well into next year.
Recently, Standard & Poor's reported that its S&P/Case-Shiller U.S. National Home Price index of real-estate values increased during the second quarter over the first quarter of 2009, the first quarter-on-quarter increase in three years. Its index of 20 major cities also rose for the three months ended June 30 over the three months ended May 31, with only hard-hit Detroit and Las Vegas experiencing declines. The week before that, the National Association of Realtors reported that sales volume of existing homes was up 7.2% in July from June.
In short, does this data suggest that real-estate prices hit a bottom some time during the second quarter, and have now begun to rise? There's no way to be certain that this marks the end of the long, painful correction that followed the real-estate bubble, but clearly prices are no longer in free-fall. That means if you've been sitting on the fence, it's time to act.
As a real estate agent, broker, homeowner and investor, I can understand why buyers have been cautious. Few want to buy in down markets, just as stock buyers avoid bear markets. And for most people, of course, buying a house is a much bigger decision than buying a stock. But with real-estate prices nationally now down about 30% from their 2006 peak and showing signs of turning up, the prices aren't likely to go much lower. Every real-estate market is local, and so there may be a few exceptions. Overall, though, I can't imagine a better time to buy than now
The real attraction compared to bargain prices is the cost of obtaining a mortgage. Rates since Labor Day have dropped to some of the lowest levels of the last two years. 15 year rates were the most attractive however, there are some reports that lenders are moving loan closing costs upward.
In addition to bargain prices and great rates, buyers also should find plenty of homes to choose from. The national inventory of unsold homes was 4.09 million units in July, up 7.3% from June, according to the National Association of Realtors. Even the stricter appraisal process is working to the advantage of buyers. Appraisals are coming in far lower than most sellers have been expecting, forcing them to face the new reality of sharply lower prices. And with stricter standards, lenders aren't going to let buyers borrow more than they can afford, which protects buyers and helps to keep prices down.
Unless you're really prepared to accept the demands (and headaches) of being a landlord, direct ownership of real estate as an investment is not recommended. The days of buyers lining up to flip Miami Beach and Las Vegas condos are mercifully gone.
There are much easier ways to make money in real estate, such as real-estate investment trusts or buying shares in home builders and other housing-related businesses (such as Home Depot). Historically, the mean rate of return on real estate has been around 3%, according to research from Yale economist Robert Shiller, who co-developed the Case-Shiller index. Shares in REITs and other stocks have often done much better.
But there's a good reason homeownership has been such a central part of the American dream. It delivers security, pride of ownership, a sense of community and decent investment returns as a bonus. On the other side of the foreclosure crisis is another story. For every hardship story, and no doubt there are many, others are realizing their dreams of home ownership and getting what may well turn out to be the deals of their lives.
Partial content courtesy of Jeremy Less, Community Mortgage, Memphis, TN
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