When changing trains, it is of course good to wait until the train is stopped at the station. When trains are moving very slowly it is adventurous, but possible, to hop from one train to the other. At full speed, even action heroes have a difficult time successfully performing this feat. Selling one home and buying another home is much like changing trains—and needs to be well-timed.
So maybe today, or, perhaps sometime in the near future; the real estate market will provide you with the time you need to ask important questions and purchase real estate for all the right reasons.
The intensity of home sales is like the speed of the train. Over the past two years the lack of inventory and insatiable real estate investors has fueled the real estate locomotive to bullet-train speeds. Buying a home is a big deal and doing it right will require some smart real estate buying decisions. Unfortunately, the speeds of the real estate market in 2012 and 2013 may not have provided the time necessary for buyers and sellers to make smart decisions.
Good news is that the hot real estate market of 2013 has been coasting into the proverbial 2014 train station platform. Just look at some of the recent headlines:
“The Slowdown in Existing Home Sales”
Federal Reserve Bank Newsletter dated May 19, 2014
“U.S. House Price Gains Seen Moderating Over Next Few Years: poll”
Reuters May 30th, 2014
“Weak Home Sales in May Show it wasn’t the Weather”
CNBC June 12, 2014
Many might be wondering, “Is the real estate market due for another correction?” I believe that instead of a real estate “double dip” we are going to experience several years of the real estate market “muddling along”. Real estate markets are region-specific and some regional markets are burning up the tracks (for instance the downtown LA commercial market, the over $2mm Beverly Hills/Malibu type residential markets and the SF Bay Area tech driven residential market). However, outside of these regions, the real estate train brake men have been working overtime.
Note that in my last blog I promised to discuss housing “affordability”, and, we will because housing affordability is the reason why this real estate train is coming into your station at a reasonable speed.
Once it gets moving, the real estate market builds to full speed with ease. A fast moving real estate market is attractive. A decade ago, the fuel of stated income mortgages ignited a real estate market stampede. Current mortgage lending standards and heightened federal regulations were designed to prevent a repeat of last decade’s stampede, and may be working. However; low inventory, brought on in part by a frenzy of real estate investors, fueled double digit real estate price increases through the middle of last year. A market with double digit annual price increases needs fuel to continue. As real estate prices rose, the affordability tank drained.
Home affordability has two components—income and capital. Let’s first discuss income. Yes the unemployment rate has been decreasing. However, in some areas where the unemployment rate has decreased, the number of people working has also decreased. For the people who are working, the median income has not budged in the last seven years. In fact, the median income as adjusted for inflation may have decreased. It’s as simple as it sounds- without higher incomes, potential homeowners cannot afford increasing sales prices. Our sales prices are just about back to the levels of the 2006 peak. Sadly, those 2006 sales prices were not affordable back in 2006 and are just barely affordable today.
Then there is Capital. Currently, too much capital is buried in the homes of owners who ran to catch the screaming real estate market bullet train of last decade. According to a recent article in the Wall Street Journal “Mortgage, home-equity woes linger”, almost 19% of U.S. homeowners (10 million) were underwater on their homes as of March 2014. An additional 19% have less than 20% equity in their home necessary to pay real estate commissions and contribute to the down payment on the next home. Combined, 38% of U.S. homeowners cannot retrieve the equity needed to move from one home to another home.
Given these factors, it is unlikely we will see the real estate train explode to the speeds we saw last decade. There is no quick fix. The forward movement of our real estate market will take time. The passing of years, one year at a time, will hopefully begin to clear our muddled real estate market.
Take advantage of the real estate market muddle. Do not be fooled by overpriced homes. Do not be fooled by speculation of run-away real estate prices. While our real estate train is at the station take the time you need to ask important questions and purchase real estate for all the right reasons.