With the nationwide unemployment rate climbing above 10 percent, could 2010 see even more declines in real estate prices?
One of the most important influences on housing prices is the employment rate. When employment is high, people are more likely to purchase. In such an environment, there is optimism that if you lose your job, you will be able to find a new one.
Today, we’re facing some of the highest unemployment rates since the Great Depression. Is it possible that the housing market can make a recovery in light of these conditions?
Here are several key factors to determine what is most likely to happen in your market.
1. Markets aren’t just local, they’re “hyperlocal.”
Prices may be down in your state, county or city, but up in your local area. For example, it’s common for the first-time-buyer market to have shortages of inventory while the remainder of the market is glutted with inventory.
To determine what will happen in your local market, you must consider the “hyperlocal,” or “micro” market, conditions. In most cases, this means what is happening within a one-mile radius of where the property is located. It also means considering only those properties that have square footage and lot sizes within approximately 10 percent of your property square footage and lot size.
2. Months of inventory on the market are the best predictor of price changes.
Even though the National Association of Realtors is forecasting that existing-home sales will jump 10.8% in 2010, after a 4.8% increase in 2009, the real issue is how much inventory is on the market in your local area.
During the 35-plus years I have been in business, I have found the amount of inventory in a given location and price range to be the best predictor of what prices will do several months from now. As a rule of thumb, price changes lag behind inventory changes by about six to 10 months. If there are only two or three months of inventory in your market, chances are good that prices will be increasing in 2010. On the other hand, if there are eight or more months of inventory, your area may experience price declines well into 2010.
3. Extension of the first-time-buyer tax credit
While many people feel the first-time-buyer tax credit was responsible for the upswing in sales activity this fall, NAR reports that only six percent of the buyers attributed their decision to purchase this fall to the tax credit.
There are two key issues for 2010. First, will the extension of the tax credit produce enough buyers to create a price increase? Second, what will happen to the market when the credit runs out? Will sales drop as substantially as they did when the Cash for Clunkers car-buying program ended? Will NAR try for another extension even though the Obama administration has signaled that “this is the last time we’re going to be caving to the demands of NAR.”?
4. Demographics bode well for increased sales activity
Gen Y (born 1977-94) are now at their peak time for buying their first home. There are now more Gen Y’ers than there are baby boomers ( 1946-64). This huge cohort of young adults is marrying and having children.
In fact, the typical married Gen Y mom has 2.3 kids. Owning a home is part of their American dream. Although the unemployment rate is even higher among this group, most still have jobs. Coupled with the first-time-buyer tax credit, this could be a strong force to drive prices upward.
5. The Real Issue: Cost of ownership, not sales price
The real driver of price in 2010 will continue to be the cost of homeownership. This is a huge wild card for a variety of reasons. If interest rates increase from 5% to 7%, or even from 5% to 6%, the impact on monthly payments would take a would-be-buyer off the market.
And changes of this magnitude could take place as early as 2010. The reason? Interest in the sale of US Treasurys that are used to finance our debt is weak. This means that the government could raise interest rates to attract more buyers. The other issue is the decline in value of the US dollar, which, in turn, can result in inflation. The Federal Reserve typically responds by raising interest rates to cool inflationary pressures.
The third factor that could drive up the cost of home ownership is the decline in tax revenues at the local and state levels. This could result in increased property taxes in some areas. Increased costs shrink the pool of potential buyers, resulting in fewer sales and potentially a decline in prices.
Bottom line: Watch the sales levels and the inventory in your local area. If sales are increasing and inventory is decreasing, look for stabilization of prices first and then, eventually, an increase. On the other hand, if the inventory is static or increasing, 2010 will probably be similar to 2009.
