With the United States is stuck in the worst housing slump since the Great Depression, it’s easy to see why most of the national media and many of us have bought into the “Chicken Little” (aka “the sky is falling”) mentality.
Prices of new and existing homes continue to fall, the inventory of unsold homes continues to climb higher and to top it all off, would be buyers are having a tougher time getting financing. (And by financing, I mean they’re actually required to have good credit and put money down. What a concept!) What’s not to love?!?
But, I mean, there is a light at the end of the tunnel, right?
There may be, but according to a recent poll on Saving Without A Budget, it looks like a vast majority of us believe the housing market has a long way to go before it finally bottoms out and finishes its correction.
Below is the breakdown of responses I received when I asked the question, “when do you think the housing market will rebound?” Needless to say, the answers weren’t pretty:
- 12% of respondents stated during the 4th quarter of 2007
- 7% of respondents stated during the first half of 2008
- 21% of respondents stated during the second half of 2008
- 29% of respondents stated during 2009
- 31% of respondents stated during 2010 or later
Now, I realize that real estate is local and in fact each of the answers given above could be correct, depending on the location throughout the country. That being said, if you think the national housing picture is going to begin to look hunky dory within the next couple of months, I’ve got a bridge I’d like to sell you.
I personally think it’s going to take a decade or longer before we see housing prices anywhere near the peak prices of 2005 and 2006. Here’s why:
Cheap financing is done. The days of ass-backwards mortgages (yes, that’s the technical term), massive sub-prime lending and no documentation loans are over. People are actually going to have to be able to afford the monthly payments for the home that they want to buy.
On top of that, with a booming global economy and rising rising food and energy costs, the days of low interest rates are coming to an end. With that, the days of 6.25% fixed rate mortgages are also coming to an end.
As you’re probably well aware, the higher the interest rate goes, the higher the monthly payment goes, and the less likely you’ll be able to afford your dream home. If nobody can buy your house, the price will have to continue to fall.
People are actually going to have to put down money when they buy their home. 100% financing has gone the way of the dinosaurs. It’s dead and nothing’s going to be able to bring it back. In order for people to get quasi-decent loans, banks are going to require potential home owners to pony up a large sum of cash (hey, remember the good old days when this wasn’t a problem?!?). In turn, this is going to keep people who want to buy on the sidelines until they are able to scrap together enough money to put down a proper down payment.
Flippers and speculators are finished. Remember those late night informercials, the ones that promised to teach you how to buy a property and flip it two months later for an $90,000 profit? Yeah, those people are gone now, too. And since they’re gone, the money they used to drive up property prices to absurd and unsustainable levels is gone too.
Housing prices have to fall back in line with incomes. If salaries can’t justify home prices, then there is a big problem. Magically, this was the underlying problem behind the most recent housing boom, as prices were shooting up (seemingly) exponentially, while salaries continued to slowly creep along. Again, this all goes back to affordability; housing prices can only go as high as people can realistically pay.
During this past boom, housing prices became so skewed that they have a long way (25 to 50 percent in some parts of the country) to fall back in like with salaries.
Unfortunately, before it’s all said and done, I think it’s going to get really ugly before it gets any better.
That being said, I’m very bullish on housing in the long term. I think that once builders get their inventory under control and slow the growth of new home development, we will see a price bottom. From there, with the continued economic prosperity of the country, couple with the continued population growth, I think we will see demand for housing begin to slowly rise, and most parts of the country will resume their typical five to eight percent annual price growth.
Unfortunately, it’s just going to take us a decade to sort this mess out to get to the turn around.