Real Estate Blog
Thursday, January 29 2009
Lately, when people ask me about current market trends, there are three issues that seem to come up over and over. The following discussion of these issues should help
residents of the Three Village area understand what is happening in our local real estate
One of the most vexing questions for my clients and customers seems to be “Why are home prices dropping so much?” Understanding the answer to this query requires a bit of historical perspective. Before the real estate market boomed off the charts from about 2000 to 2006, price appreciation was fairly standard year over year. As noted in Brookings
Papers, an often-quoted publication, the appreciation in home values in 5-year increments averaged about 26.5 % from 1980 to 2000. Then, in only 6 years, it jumped by 89%. (See Exhibit 1.) This was simply not sustainable, healthy growth. So as odd as it may sound, in a way, the market is not actually in decline. It is getting to where it should be. This is a positive step toward recovery of the market.
Many people also seem confused about how to tell when prices will go up in the future and when they will go down in the future — in other words, the direction of the local market. Here the key element is inventory. A steady market, which is neither a buyer’s
market nor a seller’s market, is generally considered to have 5-6 months’ worth of unsold homes on the market. A buyer’s market, which is where most markets are now, is
generally viewed to have an eight-month inventory. In such a market, there is an
overabundance of houses, meaning that supply exceeds demand. That is when prices drop. (See Exhibit 2.) In the Three Village area, we have a 10- to 12-month supply of homes, which means we still have a backlog. We cannot yet expect prices to go up.
Lately, the third most popular question is whether homeownership is still a good way to build wealth. Understandably, some people have lost a bit of faith in the real estate market. But that is because they are looking at only a narrow slice of the overall picture. In other words, remember that real estate is cyclical. There are booms and busts, and this is not the first or last time that home prices will be down. However, as shown in Exhibit 3, a study by The PMI Group, Inc., reveals that over a 15-year period, the value of homeownership
increases by 110%! And the return on equity, which is determined by how much of a down payment a buyer places on a home, is almost 500%! This study should leave little room for doubt: Real estate is still a wonderful avenue toward building personal wealth.
If you have any questions, contact me. I am happy to share my expertise. And meanwhile, to keep current, visit my website: www.Ardolino.com.