The S&P/Case-Schiller report on home values was recently released, and they reported that home prices are "dangerously close" to an official double dip. According to Capital Economics, the second leg of the US housing downturn will continue throughout the year, and could be nasty if a vicious circle of falling prices and rising foreclosures continues. Paul Dales, a senior economist at Capital Economics, said that “The second downward leg in house prices that began last year will continue throughout the year and take prices to a new cycle low, some 5 percent below current levels.”
To less educated individuals, this news might seem discouraging. However, Woody & I have been around this business long enough to know to take each news story with a grain of salt, because there's always a positive side to every story. Mr. Dales went on to say that “with well over 5 million homes either up for sale or in foreclosure, the rental market could be very strong. After all, the fact that rental demand is rising and rental supply is already tight means that for the next few years the rental market will be the best performing part of the residential market…which is music to many investor's ears.
Additionally, a further drop in home prices will certainly increase foreclosures, which has been a big profit center for savvy investors for the past few years. In the US, 25% of households have negative equity, and another 25% don’t have enough equity to refinance. Another drop in values could send many homeowners searching out an investor to help them unload the property. Why? Because as Laurie Goodman of Amherst Mortgage Securities explains, “Home Equity is the single most important determinant of mortgage default, not unemployment.”
A third potential benefit to falling home prices is that home affordability in the U.S. continues to rise. In fact, the home affordability index is the best it’s been in over 8 years, and Trulia just released a report showing that it’s cheaper to buy a home as opposed to renting in 72% of U.S. cities. This is a very powerful statistic that should motivate many potential home buyers that find themselves "on the fence" about whether to purchase a home in this current market.
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