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In the previous 2 posts we looked at the “damage” from the housing bubble - in terms of the percentage of mortgages underwater. I mentioned that it probably wasn’t the best idea to think about the (sales price) highs of 2007 in terms of forecasting the immediate future of real estate prices. As discussed, the real estate prices reached in 2007 are pretty much for the history books and not to be visited anytime soon. As Edwin pointed out in the price to rent ratio, home prices are heading back to fundamentally affordable levels. I think this is a “good thing” as we all need affordable housing and the prices at the peak of the housing bubble aren’t sustainable. We still need to determine if we are at a bottom in housing prices and how to navigate the present and near term with regard to real estate.
When you look at the national housing market up to about 2009, it is quite obvious that a few areas (Florida, California, Arizona, Nevada) account for an inordinate amount of the “damage.” As we go through 2010, you can expect to see a direct correlation with the unemployment rate and foreclosure activity. For example, as unemployment increases, areas like Michigan (Big Auto) Idaho, etc. begin to show negative housing statistics as a result of unemployment in their respective region. This gets into why I see this unwinding or corrective process taking longer than people expect.
So, given the unemployment picture, I believe that 2010 will set the record for foreclosures and mark the actual bottom in the housing market. The bottom does not mean we immediately turn up and back to robust growth. This will simply mark the bottom. The real estate market and banks will be working off banking foreclosures well into 2013. This is my best guess as to how the next few years will play out. I see this playing out for 3 key reasons:
1) Unemployment is currently around 10%.
2) There are $ 2.5 Trillion of Option ARM and ALT A Loans that are coming due over the next few years.
3) Currently there are several hundred thousand mortgages that are showing late or delinquent status (but not in foreclosure yet).
The other area that will hold housing down for some time is that banks are still somewhat reluctant to loan as they work through their REO (Real Estate Owned) inventories after helping to assist this housing bubble. So, given that picture, I wouldn’t be in a rush to go out and buy a home, however; I would start to prepare for an environment that will serve up a multitude of affordable housing regions. Here are a few steps to consider and prepare for over the next few years whether you own currently, or are planning on buying soon.
1) Evaluate – What can you afford and be real! First, if you own a property, evaluate whether you can afford your current mortgage or not. This is only my opinion – but if you are in a home that you simply cant afford or is more than 15-20% underwater, contact your bank and either look to rework your mortgage of consider a short sale. This is not advice to act irresponsibly however, in order to survive in this environment you need to work out the best deal possible for your self. I also believe that the banks are eventually going to be forced to take write downs (discount) on prices across the board to bring liquidity back into the market. So, don’t feel stuck if you are an existing home owner. On the flip side, don’t sit on your hands just doing nothing or waiting for prices to rise to your level.
2) Research - If you are on the sidelines and considering buying real estate, I would recommend that you start tracking the median prices for areas of interest via particular zip codes. Certain areas will correct more than others and because of this offer better deals. You can do this by visiting places like Realty Trac or Zillow
3) Investigate – Once you’ve determined the areas above that are desirable, you should begin to visit the particular neighborhoods in the area to get a feel for what feels like home to you. A lot of people do this in reverse not knowing the home they just bought is in a rapidly declining area. This step can actually be a great idea for weekend getaways.
The good news with all of this is that there should be some absolute steals in real estate for the next several years. Hopefully, this 3 part series has given you a better insight to the real estate market correction and how to better prepare for the immediate future. Don’t fear it; just understand it and take action.
The 2 preceding Posts to this 3 Part Series can be read here:
Understanding the Real Estate Correction Part 1
Understanding the Real Estate Correction Part 2
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Good series of articles. It’s a very complicated issue and I think you covered it effectively. I agree that the market isn’t quite at a bottom yet but I also don’t really have a good estimate for where the bottom will be. I haven’t taken a very in depth look at inventories yet but you can bet that different areas of the country will reach their bottom at different times.
It is a good idea for homeowners who are upside down or having trouble making payments to contact their lenders but the downside is how many people have already tried this and their banks refuse to help in any significant way.
For some people, just leaving their homes and stopping payment is a good idea. Yes its horrible for their credit but they are far better off living in a reasonably priced rental than paying for a house that is costing them piles of money along with great stress. I don’t think its irresponsible to fix your life, particularly when you had a minimal effect on causing that problem.
After housing corrects and if there is no more irrational inflation of home prices, the state of housing in the country will be much better. At the rates it was increasing before and during the bubble, housing would become totally unaffordable in a very short time frame.
Thanks for your comments Edwin. I agree this process is going to be long term good for housing. Where I live people had to lie (stated income loans) just to afford a 300k house that was really only worth 125k. That was the median price here in Orlando. Many people and banks are not going to come to this conclusion however, I just don’t see any other alternative.
On a personal note, I am happy to rent for the time being and will soon start to search particular areas with the ideas of eventually buying; just not now.