When Do You Think Housing Will Rebound?

by Justin Weinger on October 9, 2007

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.

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{ 7 comments }

Kenneth October 9, 2007 at 11:00 pm

Eh, it was overdue for the correction anyway, so in the long rung I think we’ll all survive… well I hope so anyway. For that matter, anyone who owns a house for the long term investment is in no danger of loosing any of their 2005 era fictitious money. 🙂

As for the late night infomercials, get this, I just saw one the other night with Donald Trump himself hawking “proven techniques” he used at amassing wealth by buying foreclosures and auction properties. So, no, they’re not gone, they’ve just changed from flippers to gold diggers.

I think the middle to end of 2008 will show stability, IE no more falling prices. Rebound to 2005 prices, 10 years!? Considering I live in a model that same in the neighborhood sold for $715k in 2005, and I paid just barely over $500k in 2007, then yeah, probably, but if I “made” $200k in 10 years, I’d say I’m doing OK. To think I could cash out with 50% gains in 2-3 years would be, well, 2005 mentality.

Nice article BTW.

Brian Carr October 10, 2007 at 1:26 pm

I agree the market was long overdue for a correction – which makes me worry that prices became so artificially inflated that in order to truly correct, the average home price will need to drop between 25 and 50 percent from peak levels.

I don’t agree with you regarding the time frame of price stability. The housing pundits talk about the ARM reset fiasco like the only wave of first time resets will be between October 2007 and April of 2008. In reality, the wave of first time ARM resets will occur between now and probably the first part of 2011!

Rhea November 7, 2007 at 12:35 pm

Real estate cycles are many years long. Just look at history. Anyone who thinks things will rebound next year are uninformed. I live in Boston and real estate was sky-high until August 2005. Then it began the slide. Foreclosures, mortgage rate resets, and more. It was way out of control.

Brian Carr November 7, 2007 at 1:03 pm

Rhea, I agree with you. I think this is going to be a lot longer and a lot more painful than what many people (especially the NAR) believe. I’ve been telling my friends to expect a slow real estate market for the next decade.

I wish we could let the correction run its course because I believe we would see a rebound much sooner. It just feels like we’re trying to delay the inevitable.

Personal Checks Unlimited February 26, 2008 at 10:17 am

Really sober post Brian. Some areas are hit harder than others… We live in the Florida panhandle. My wife was doing some research out of curiosity and discovered that in our small town there were 122 homes in foreclosure and in a larger nearby city there were 186.

Definitely a reality check. Anyone with any real experience in real estate knows that these things take time to balance out, and with the size of this imbalance it’s definitely going to be a while before we see any relief.

-Alan

Justin H. from Checks For Less April 3, 2008 at 7:41 am

I agree with Kenneth. As a matter of fact my own property in South Florida is another example. Bought it in 2002 for just under 500k, in 2005-2006 similar homes were selling for $750-$800 and now in 2008, you can’t get more than $700k for them.

James June 14, 2008 at 9:21 pm

How can you say that? I mean, it just doesn\’t make much sense in the long term.

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