Has the housing market really hit bottom?
Assuming that housing is at the latter end of its correction means buying now might yield returns of 20 to 30 percent or even more over the next seven to 10 years
Depending on who you talk to, the housing market has been under varying degrees of stress since mid-2005 or late 2007. So have we hit bottom or are we still in correction mode?
As the expression goes, “time heals all wounds,” and the housing market certainly has proved this ancient axiom true. The various forms of stimulus — tax credits, monetary easing, etc. — certainly prevented the housing market from falling off a cliff, but they produced few net gains. The market just needed time to recover. So, as time has marched on, we see signs all around us that housing is slowly coming back to life.
The impact of the greater housing market on the local and national economies is undeniable, considering the housing sector and related industries represent an estimated one third of the national GDP. This is not to mention the amount of personal wealth Americans have traditionally invested in real estate.
One of the first signs of a recovering housing market is the record-high numbers of cash transactions across most price ranges. The simple fact that homebuyers and investors are willing to invest cash in real estate telegraphs that there is an intuitive belief that there is identifiable upside in real estate and the downside risk is minimal.
Assuming that housing is at the latter end of its correction means buying now might yield returns of 20 to 30 percent or even more over the next seven to 10 years — an enviable outcome.
Curiously, one of the most tragic byproducts of this housing cycle, foreclosures and short sales, might also be the leading contributor to the housing recovery. Nationally, 50 percent of all homebuyers are buying for the first time.
When the housing downturn started, many of these first-time buyers were in their later years of high school or college, and the benefit of time combined with advantageous conditions has created a new generation of homeowner. For the first-time homebuyer, foreclosures or short sales provide plentiful, affordable housing options.
Although the lending process has gone through a transformation – with an emphasis on more sustainable lending practices through more stringent underwriting — favorable financing is very much available.
The foreclosure process has also put significant pressure on the availability of rentals as families and individuals exiting homeownership seek alternatives.
Fueling a recovery
With housing prices and interest rates declining in almost complete synchronicity, a rare happening has occurred: In many cases, the net cost of a mortgage payment is less than rent for a similar property.
The combination of low housing prices, historically low interest rates and the tax advantages afforded homeowners all comprise the favorable comparison to renting.
But how does that impact the rest of the housing market? According to the National Association of Realtors, 80 percent of all potential homebuyers are under the age of 55, which means that in addition to first-time buyers, there are many current homeowners looking to trade up.
First-time buyers are generally between the ages of 25 and 35 with a heavier concentration in their late 20s to early 30s. These first-time buyers are not just buying foreclosures, they are also buying non-distressed re-sales from home sellers wanting to move up, so that they too can take advantage of the favorable conditions. This is the process that is fueling housing’s recovery.
Provided that one’s personal financial condition permits a move up, this is the perfect time to do so. The strategy of selling in this market to buy up — even though you might not be getting the price for your current home that you would prefer — also takes into account the price of the home you are buying, which is suppressed as well. The difference is the new home will be more expensive than the one being sold and the gain in equity in terms of real dollars will therefore be larger.
Also, the basic overall cost of acquiring the next home is less expensive, due to historically low interest rates currently between 2.75 and 4 percent, depending on the mortgage product of choice.
Every day, more buyers representing all the different demographic strata of housing enter the market. There are even pockets where inventory is in short supply. Housing is clearly moving in the right direction. It will be a steady climb off bottom – and it will be one worth participating in.
Christopher J. Masiello is president and CEO of Keene-based Better Homes and Gardens The Masiello Group, which has offices in New Hampshire, Maine, Massachusetts and Vermont.