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If I were to tell you that investing in real estate over time is less profitable than investing in Treasury
Bonds, what would you say? Probably that I must be a very unhappy mortgage professional who is
looking to get into the financial planning enterprise and wants to start selling you other investment
products or that I am just plain Crazy. That financial strategy discussion will be left for another day;
what I do want to discuss is the outlook for home values and what should homeowners and potential
homebuyers know in order to make a good speculation decision. As we all know, one of the appeals to
becoming a homeowner is that it is regarded as a safe investment; what you will most often hear is
that the historical appreciation midpoint for residential real estate is approximately nearby 6.5% annually.
Those of us who were fortunate sufficient to own or buy homes prior to the price acceleration that took
place beginning in 2001 have greatly benefited; either we sell or not, the wealth, in the form of
home equity, that real estate has created for our families took place with diminutive exertion and capital on our
part. Just like the dot.com stock shop boom of the late 1990s, real estate investing seemed like a
sure winner no matter where or what you bought. As Barry Hahib, founder of the Mortgage Market
Guide, has been known to say "Everyone looks like a genius in a hot market." Thus, as consumers
you need to carefully correlate the shop conditions in order to make an informed decision when it
comes to purchasing residential real estate; it is foremost for you to decree under what
circumstances it might make more sense to buy or rent, upgrade/downgrade or stay put.
What is the shop telling us?
Obviously, with the rapid increase in house prices many experts in the industry began
warning of a Housing Bubble; but what does that precisely mean? How do they decree either or
not the "weasel" is going to pop? Affordability has now become an foremost factor to think when
assumptions are to be made about the direction of the market; so let's first start by looking at what is
happening on the shop side of housing and what some economic indicators are telling us about the
status of housing. There are many home price indexes that we can turn to in order to formulate some
conclusion as to the real direction of the housing market; however, as with any economic report, one
should not ascribe more value to one or the other but instead rate all the facts collectively
and task the market's course.
The Office of Federal Housing enterprise Oversight (Ofhoe) data, which is a data series
that has tracked house prices of repeat sales since 1975, show that real (adjusting for inflation) house
prices have cyclical patterns of increase and decrease, just like the economy. But allinclusive that real
house prices are approximately 60% higher than they were in 1975, with the bulk of the increase having
occurred since 1995 (Schiller). The most new data from Ofheo indicates that the housing market
is experiencing price increase deceleration to 2.6% through three quarters in 2006. The Freddie Mac
Conventional Mortgage Home Price Index shows a diminutive increase of approximately 1% in 2006 compared to
2005 (Federal withhold Bank of Boston). The Case/Shiller Home Price Index most recently published
its findings indicating that prices were declining in 17 out of 20 cities in January 2007; most relevant
to our region, Boston, had a negative price appreciation of 5.6%. The National association of
Realtors' midpoint Sales Price of Existing Single-Family Homes Index also indicates a negative 5.5%
decline in prices for the Providence-New Bedford-Fall River area; in Rhode Island itself the change
was even less, negative 0.14% with angle for a 1% to 3% increase by 2008. So as you can see,
the facts varies due to the fact that these agencies all get facts a diminutive differently; and
overall it would be a safe bet to halt that the housing shop has slowed down, but has it
bottomed out or is the decline likely to continue?
What you should know.
Economic fundamentals: low interest-rate environment, high employment, and rising incomes.
The "chicken soup" for increasing asset values; as habitancy work and earn more, they demand
more housing (size), especially if they can speak their housing cost to revenue ratio at the same
level due to lower interest rates. From 1995 to 2004, mortgage interest rates experienced a general
decline; only recently, with the Fed adopting a tightening policy, have rates begun trending upward but have since stabilized. However, there is also another factor that is sometimes overlooked which may help to account for house price increases: land availability or what experts call inelastic supply. Many
metropolitan areas have adopted land-use restrictions, construction permits quotas, and minimum acreage
rules that have caused request to surpass supply.
Real house price declines are very rare in the history of the United States in general; in fact,
you would have to go as far back as the Great Depression to be able to point to a national decline in
real house prices. But in those days approximately everything experienced a decline in price, other than
alcohol. Historically, slowing increase in real estate coincides with slowing increase of the economy;
2001 was the only time that real estate values precisely increased while the rest of cheaper contracted.
Therefore, we should think national indicators for what they are: national; what precisely matters, as
any real estate agent will tell you, "It's the "local" market, stupid!" Well, maybe not in those exact
words but you get my drift. If the local cheaper is in a increase stage, unemployment is fairly low and
incomes are increasing, then you have a good foundation to withhold request for housing. All of these
conditions are present in both Rhode Island and Massachusetts as of today; and so far there is little
indication that it is going to suddenly collapse. But it is foremost to understand that there are some
factors that will cause inescapable localities to caress price declines in home values; one of my
favorite statistics to look at is the level of investor nearnessy in a definite market. This is foremost due
to the fact that investors will take losses in order to move inventory, especially because they will have
saturated a inescapable shop with too many homes already in their attempts to stay ahead of demand.
When a shop is dominated by owner-occupied purchases, then there is very diminutive occasion of real
price declines. If foreclosures were to become a real necessary question in this shop it could lead to
further price erosion, especially in low-income areas; however, it is foremost to point out that amid
all of the media coverage, about 87% of all sub-prime loans are still in good standing. And ultimately if
there were an unexpected increase in oil prices due to a disagreement or natural disaster then it could be a
negative force for the local economy.
Conclusion
Call me the ''Optimistic Contrarion''! Today's shop presents with much good conditions
for the individual to buy real estate than compared with new years; it is a Buyer's Market. With
housing provide being at such high levels, there is much more selection for the consumer and the
opportunity to structure a more financially sound loan. Some will point to new statistics about
how homebuilders are cutting back significantly and that this will continue to drag the market
downward; I take the opposite view. The less building, the better; the shop must work off the
excess provide of homes and can do so much more precisely with a decrease in housing starts, which in
turn should diminish the slowdown and facilitate added expansion.
While rental housing in New England has been very affordable as compared to the rest of the
country (it's true!), there are some signs that this is going to change. For one, the rise in real estate
values and increase in extremely mortgaged homes is going to lead to an increase in rent; in essence, rents will catch up to relative housing costs in order for habitancy to be able to make their mortgage payments. another fascinating pattern is that condominium prices have increased significantly in the past few years; in my concept a reaction to the affordability concern, which means that condominium sales are speculative in nature. And once condo prices advent single-family home prices, then
affordability will not be a driving factor for that market, which in turn should drive request back to
single-family homes. ''Goldilocks''. Those of you who read my former report know that this is what most habitancy think is going to happen to the economy; it just means that there will be a gentle slowing
without foremost to recession. Those of us in the lending and real estate industry would probably
prefer to have what I will call the ''Dreadlocks'' economy; why? Because, if you are in the lending
industry you are all the time looking for some ''dread''-ful signs from the economic reports but at the same
time not wanting them to occur. The presume for it is that house prices are much more sensitive to changes in interest rates due to the new trend of low-down cost loan programs; but mortgage interest rates are very much driven by inflation concerns. So if the news on the economic front suggests poorer conditions, rates will go down, thus ultimately supporting house price values. During his last statement before the Congress, Federal withhold Board Chairman, Ben Bernanke, basically
hinted that inflationary pressures remain a concern but that the Fed still forecasts a downturn in
consumer price levels. But like all forecasts, it is foremost to understand that they are branch to
change based on the available data.
Rui Rosa, Cmps
Mortgage Advisor
Coastway reputation Union
10 Greene Street
Providence, Ri 02903
rrosa@coastway.com
Disclaimer: The opinions and analysis in this report express my own views and do not reflect those of
Coastway reputation Union in any way.
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