This is the time of year when the most frequent question that I am asked is about home prices and which direction I expect them to move during the upcoming year.
Over the past three years, I have not made many friends, as my opinion on home prices has been quite negative. But this year, I am pleased to say that I am finding myself to be rather optimistic (well, optimistic relative to the past few years, at least).
The real estate data that I have reviewed suggests some markets are likely to exhibit positive price growth in 2012. Markets that are seeing sustained employment growth and price stability in the second half of last year are the ones most likely to see some very modest price growth this year.
In fact, I am somewhat surprised that we have not seen some price increases already. From an economic standpoint, there is a very reasonable argument that suggests that real estate prices are actually below where they should be, as they remain below the long-term trend line.
Below you will see a chart that demonstrates this theory. The blue line represents the Case-Shiller 20-City average since its inception and the red line shows where we would likely be had we not seen the real estate bubble. As the chart shows, prices are now below the long-term trend, therefore suggesting that houses may well be cheaper today than they might have been if we had never experienced the market of the past few years.
If this is actually the case, then why aren’t prices higher? Well, there are still a number of anchors that are holding us back. The first of which is the shadow inventory in the shape of distressed homes. Many foreclosures have been trading at below market value and, in some cases, below replacement cost. This naturally holds down values.
Secondly, and equally as important, are the continued issues with obtaining financing for the purchase of a new home. It remains remarkably difficult to get a mortgage, which has led to an unusually high percentage of proposed purchases falling through.
As I gaze into the crystal ball for 2012, I am hopeful that we will start to work through the excess of supply that is currently in the market at a faster pace. I am also hopeful that lenders will become less pessimistic and allow more purchases to close at the agreed-to prices.
When combined with improving economic conditions, I would not be surprised to see several markets exhibit modest price growth in 2012. That said and, as we all know, real estate is all about location; therefore I do not expect that price recovery will be equal across all markets.
In all, I remain hopeful as we enter 2012 and believe that will see several real estate markets improve in the coming year.
Posted with permission from Matthew Gardner
Mr. Gardner is a land use economist and principal with Gardner Economics and is considered by many to be one of the foremost real estate analysts in the Pacific Northwest. In addition to managing his consulting practice, Matthew is a member of the Pacific Real Estate Institute; sits as a trustee for the Washington State Center for Real Estate Research; the Urban Land Institutes Technical Assistance Panel; is an Advisory Board Member for the Runstad Center for Real Estate Studies at the University of Washington. He is retained by Windermere Real Estate Company and the Seattle Master Builders Association as in-house economist. He has appeared on CNN, NBC and NPR news services to discuss real estate issues, and is regularly cited in the Wall Street Journal and all local news media.
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