As most of us have witnessed to one extent or another, 2007 and 2008 were two of the worst years for the real estate market that we've seen in our lifetime. Some have compared the current real estate market slump to the real estate market crash of the 1980s, when the affordability of home ownership dropped drastically due to record-high mortgage interest rates, which peaked at a whopping 18.45 percent in October of 1982.
While prices of real estate may not improve much in 2009, there are indications that we may see some semblance of a recovery this year. This ultimately means we could actually see an improvement in real estate prices that have been tumbling in a downward spiral for the past two years.
One of the main reasons for this glimmer of hope is that many "experts" anticipated the market bottoming-out in 2008. The real estate market is cyclical; recovery can't begin until the market reaches rock bottom. In order to know where we're going, we need to know where we've been; in order to understand the recovery of the real estate market, it's important to first look at the factors that left us with the real estate market we currently find ourselves in.
Factors Attributed to the Current Real Estate Market
Factors Attributed to the Current Real Estate Market
One of the most important factors atttributed to the current real estate market is that prices in many areas throughout the U.S. doubled between 2000 and 2005, the so-called Real Estate Boom of the Millennium. In some cases, in states like California, Florida and Nevada, prices of some homes actually tripled. Not surprisingly, these are three of the hardest-hit states for foreclosures in the current real estate market. Coincidence? Hardly.
As prices continued to increase, more and more people found themselves unable to afford the purchase of a home; tops on the list being entry-level home buyers, otherwise known as First Time Home Buyers. As the number of buyers able to purchase real estate started to decline, home sales began to decline. And as in any model of Supply and Demand, as the demand for homes started to level off and then decrease, prices for real estate and home values soon started following the same downward spiral into the proverbial toilet.
Another factor attributed to the current real estate market was the issuance of subprime loans; high risk/low down payment loans issued by lenders and home builders to home buyers who didn't have the monetary capacity and/or creditworthiness to purchase a home in the first place. Armed (pun intended) with ARM's (adjustable rate mortgages), lenders and builders feeling the need for greed lured unsuspecting home buyers into loans they couldn't afford; especially when their ARM's matured within the 12-24 month period of being issued.
When the real estate market came to a screeching halt in the spring of 2007, a large number of home owners who had purchased homes in active markets were suddenly left with ARM loans that had matured, increased monthly payments due to their loan being reset with higher interest rates (monthly payments hundreds and in some cases even thousands of dollars higher than their original loans), plummeting property values and homes worth far less than the balance due on their loan (otherwise known as negative equity).
At this point, the rate of loan defaults and foreclosures began to rise exponentially. Short sales, REO's and bank owned homes became the "new" buzz words in real estate. As more foreclosured homes came on the market, inventory of homes began to skyrocket as values plummeted. As inventories increased, builders stopped building homes and started defaulting on their own loans. Economic growth began coming to a standstill; job layoffs and a record number of people on unemployment have further fueled loan defaults and the subsequent foreclosures that have followed.
While it has taken some time, assistance is now being provided to current as well as prospective homeowners. On February 17th, President Obama signed the American Recovery and Reinvestment Act of 2009. Portions of this bill will allow home owners to negotiate with their lenders to refinance their loans and/or obtain loan modifications on their existing loan, which is anticipated will help stabilize the rate of foreclosures. The bill is also intended to help jumpstart home sales by allowing First Time Home Buyers to take an $8,000 tax credit on a home purchased before December 31st, 2009.
While it seems like everywhere we look we see and hear reports stating the doom and gloom of the current real estate market, believe it or not, there are actually markets in the U.S. where home values and prices continue to increase.
On average, real estate prices nation-wide are about 5% less than they were last year; that said, many areas are still experiencing price increases, largely due to local economic growth. Examples of buyers who are capable of purchasing homes include real estate investors, First Time Home Buyers and homeowners who are selling their homes to either purchase smaller homes (downsizing) or move into a retirement community. Examples of such markets include Cape Coral, FL; Phoenix, AZ; Bayside Park, MS; Charlotte, NC; Beaumont, TX and Knoxville, TN.
Remember, when all is said and done, real estate is still the single most valuable vehicle for creating financial security and independent wealth. Will the market turn around? History is on it's side that it will.