Have we hit the bottom in the housing market Richard Hartian ask? The U.S. housing market was in a major boom cycle for almost 20 years, beginning in the late 1980s and lasting until 2007. However, the residential real estate industry has been in a major slump since late 2007, and has been buffeted by macroeconomic events as well as the inevitable “bust” that follows a two-decade-long booming market.
The financial crisis that unfolded in 2008 and 2009 was directly related to the mortgage-backed derivative markets plummeting in value when it became clear that many millions of homeowners would eventually default on their loans. The financial crisis and uncertainty over the very stability of the financial system led lenders to begin drastically tightening their standards, which just tightened the screws on potential borrowers and the real estate market even further.
Fast-forward through three years of misery and declining home prices in most areas of the country, including as much as 60-70% declines in a few cities like Reno and Phoenix, and as of 2012 there are finally a few signs that the comatose U.S. real estate industry still has a pulse.
While there are a few regional bright spots starting to show real growth, it is important to remain aware that the big picture is still pretty gloomy for 2012. Home prices nationwide will very likely continue to drop at least through 2012, because the national figures are weighted toward the lower end of the market, which is the most distressed segment.
While lending standards remain relatively tight, the financial crisis is largely over and banks are making more home loans, at least to well-qualified borrowers. The big issue today is the huge backlog of pending and potential foreclosures. Almost half of the homes sold nationwide in January 2012 (47%) were distressed (in foreclosure or a short sale), and most real estate experts expect that number to stay at close to 50% or even inch higher for another year and change. While a few pundits predict foreclosure rates will start to drop by the end of the year as banks work through their backlog of cases, most see the foreclosure issue hanging over the U.S. housing market until at least mid-2013.
However, keeping in mind the market axiom of supply and demand – prices lag sales – and the fact that the real estate market is in a gradual process of bottoming out on a regional basis and that home sales nationwide are almost certainly going to improve before too long, one could certainly make a case for the next 12 months as a perfect opportunity to invest in select regional real estate markets.
Nothing lasts forever. That applies to housing slumps just as much as the fleeting beauty of a flower, and the current U.S. housing slump is no exception. The fact of the matter is that a number of areas like Miami, Boston, Austin and Kansas City are projected to see price gains of up to 5% in 2012. These cities are literally just the canaries in the coal mine…many more cities will see increases in residential real estate prices in 2013 and many more in 2014.
The population of the U.S. has not declined, and in reality the net worth and purchasing power of Americans only dipped a few percentage points as a result of the recession of the last couple of years (and the trend is already reversing), so there is no compelling reason to believe the housing market will not rebound. Of course, the timing and magnitude of the rebound is very difficult to predict, but by any reasonable measure it fair to say that the “worm is turning”.
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