The big news earlier this week was that pending home sales in March were up 21% vs. the same period in 2009. While that sounds promising, it must be kept in mind that many buyers were rushing into the market to take advantage of the homebuyer tax credit, which expired at the end of April.
At the same time, we’ve been assured that the economic recovery is underway. Then again, we’re still facing a significant number of mortgage resets over the next year or two. So what does the future of the housing market hold?
Given all of this uncertainty, I thought it would be interesting to run another poll, this time focusing on when the housing market will recover.
Yes, I do realize that real estate is highly localized, and that it’s difficult to give an answer for the market as a whole. Just do your best. 🙂
And, as always, please feel free to chime in with a comment to give some context to your answer.
17 Responses to “When Will the Housing Market Recover?”
Hopefully, never. Pre-cash housing prices were a bubble based on fiction.
New houses were bought on the expectation of ever-increasing oil stocks, and equity loans were based on appraisals that were themselves based on a fantasy that the stock market (Futures, specifically) would be on a perpetual climb.
This flies in the case of how the markets work. Both futures and real estate markets.
Hopefully, housing prices will never return to pre-crash prices.
Residential real estate, especially in the form of investment residential property, is a liability in addition to being an asset. Most real estate properties have loans and all properties have expenses for casualty/ liability insurance, state and local taxes, repairs, and typically, a fee based property manager. These properties, when vacant, all require utility payments and increased security vigilance. So, even in the best of times, making a buck on a piece of residential real estate, from an operational stand point, is tough! If you add the pressure of a market saturated with foreclosures while experiencing a real 15-17% unemployment rate and the threat of drastically increased long term financing rates, the risks associated with purchasing residential real estate are real and mounting. The odds of realestate prices continuing their decline, especially in high unemployment stressed areas is almost a certainty.
I think it will be at least 15 years.
@Funny about Money:
The housing does not appreciate because of its location. The land that the house sits on is what is appreciating. The building itself is either depreciating (if you do not maintain it) or holding steady + inflation if you keep sinking new money into it year after year to keep it up.
Also, the rate of inflation is not the same in all areas because the cost of living goes up and down at different rates based on local markets.
Hmm… Wait: I think I may have voted wrong. By “pre-crash” levels do you mean “bubble” levels? If that’s so, I’d agree with the 54% who said “never.”
But if you intended “pre-insane bubble levels,” then I think real estate prices will return to normal — i.e., to where they were before the overheated run-up in prices — in about three or four years. Once that happens, I think they’ll stay there for quite a long time.
@ Tom: Agreed, most of the time what looks like “appreciation” is actually inflation, and it’s offset into the negative numbers by the cost of upkeep. But don’t you think that some housing appreciates because of its location? Here in Phoenix, for example, burgeoning sprawl pushed up the value of centrally located middle-class districts. The few midtown areas with decent schools and low crime rates remain in high demand even as the houses age. Most people really don’t want to commute halfway to Yuma, and if they can afford it, they’ll pay more to buy closer to their workplace. As a result, my house is presently worth more than I paid for it right before the run-up in prices.
As somebody with a finance degree, I know that houses (or any buildings on a piece of land) DO NOT appreciate in value, but depreciate. The land that the house sits on appreciates, but not the house itself.
If this is true, then why do house prices go up over the long term?
People forget that the home owners HAVE TO continually sink in money, year after year, just to keep the property maintained. Things break. Roofs wear out, etc. By simply maintaining a house, you only get to keep its value at breakeven. Any appreciation beyond the cost of maintenance is due to inflation. Any appreciation above and beyond inflation is due to a housing bubble where prices will eventually correct by falling back down to reasonable levels.
One Question for Forty2:
Can you prove that the market took an $8,000 “haircut” on April 30th? If so, please share it with us. I bought my house in October 2009 for $111k with the $8k credit (net purchase price $103k), but the tax man is valuing my house at $113.5k. I need some studies/evidence to prove my house is only worth $103k.
I think the housing market will recover in “nominal” terms but not “real” terms. In other words, the value of houses will return to the prices we saw at the top of the bubble in 2006-2007, but the reason for those prices will not be because the price of houses went up but because the value of the dollar went down because the Obama printing press will print up new paper money to cover the government deficits. You will also have $5 McDoubles on the “Dollar Menu” and $25 Footlongs at Subway. The price of everything will go up and the government will say that we have recovered even though wages won’t go up as much.
We don’t need our housing market to recover to pre-crash levels. We’re just hoping for a 10% increase in the next two years so we don’t have to PAY to get out of our current place. We’ve already given up all hope of having any extra equity leftover to roll into a place big enough to have children.
If the price of a delicious fish taco fell by 40% year after year after year, I’d be delighted and would start eating more yummy fish tacos. In other words, this will stop whenever prices get low enough people who wanted to buy but couldn’t can afford it and pull the proverbial trigger.
I am constantly amused by people who think because they own a piece of real estate they are entitled to a market which allows for perpetual effortless arbitrage.
In a sane economic climate the bubble would never have happened. I voted “never” because house prices were so artificially bloated during the craze. These were never real, sustainable prices.
As of April 30, every place on the market took an immediate $8,000 haircut. If interest rates go up, prices will drop again.
This isn’t over, not by a long shot. When the average citizen can buy a place with at least 10% down costing 2-3x annual income, then it’ll be over. I can buy old ugly condos or nasty REOs that are basically teardowns, but I don’t want either one. Oh sure I can “afford” much more, but why would I stretch myself financially? I just want a little bungalow on a patch of land. Not here.
Good comments. I think most folks have a solid understanding that housing historically grows with inflation or wage growth. Inflation, as measured by the CPI, is below 2% while wage growth is flat. This means that, at best, housing will grow at 2% per year from here. This means most areas may take a decade or more to recover. If interest rates spike without an equivalent jump in incomes, housing will fall further. Remember, a 1% increase in rates reduces affordability by about 10%. And, rates can rise quickly. Just ask a Greek. Their rates have gone from 5% to 15% in a matter of three months. While we probably wouldn’t experience that, even a 3% jump would wreak havoc on the housing market.
I would echo Ethan’s sentiments. This was an asset bubble on a scale that had never been reached before in this country (not sure about the rest of the world).
If you could find the NAR chart that showed new housing starts since they began keeping track (I believe in the 1960s), it would show that starts were approaching twice the highest end of the range of the last 50 years. This happened in the midst of low population growth which means we have far more housing than we need.
As for my part of the country, Cincinnati, we’re fine. No boom, no bust, just a little slower than before the bubble, but not by much.
Also, as Jim alluded to, Dallas will certainly fair better than Las Vegas. This was due, in part, to tougher laws in Texas that forbid the use of home equity as a checking account.
It will be interesting to see if other states will follow Texas’ lead in regulating home loans a little more closely. This type of legislation probably wouldn’t work until the economy fully recovers and we get back to a more ‘normal’ unemployment rate, but if states want to avoid this type of problem in the future, regulation is the best solution.
5-10 years on average. 2 to 20 years depending on the market.
I voted 2018 or longer. Thats given that the national average prices are still down about 30% from the peak we hit in 2006. So I’m guessing it could take ~10 years to return to that peak again. But depending on the market prices could easily recover in 5 years or less. Las Vegas would take 15-20 years to return to the peak. More stable market like Dallas could potentially return to the high in just a couple years.
I’d love if all the people who said 2012 or 2015 were right. We’ve lost about 40% of our home’s value (and compared to others not far from here, we’re in good shape), and I don’t see that springing back up in the next 2, 3, 8, 15 years. I assume at this point that whenever we sell our house – whether it’s next year or when we retire – it will be for a loss.
I think that the concept of “recovery”, while certainly the way we normally think about these things, is flawed. If what real estate did two years ago was revert to the mean of the inflation rate, then what do we mean by asking when it will “recover”? Are we asking when a new bubble will form?
I don’t have my hands on a chart at the moment, but I suspect that current housing prices are not at all out of line with long-term historical housing prices relative to other goods and services. Which means there is nothing to recover. This is the new reality. Expect merely inflation-matching growth from here. And if you get more than that, assume it will revert again at some point.
Note that this doesn’t mean the recovery will be slow – it means there will never be a recovery. By the time nominal prices are back where they were in 2006/2007, inflation-adjusted prices will have moved on. So even when you appear to have recovered your equity, you won’t really have recovered the buying power it once represented. The only way you would enjoy a true recovery of buying power is at the top of another bubble, and not even then if you take the time-value of money into account – the money you’ve had tied up in that asset during the intervening years.
I think we are looking at multiple years before we begin to come close to those levels. Maybe 5 or more years?
I look at it this way: once you lose money, its harder to recover, and you have to grow your investment at a higher rate than your percentage decline.
For example: Lets say that you have $100. If you lose 20%, you now have $80. To get back to that $100 level, you have to increase 25%.
In this case, if a market has dropped by 20%, and is recovering at 3% per year or a comparablly low rate, you can see how it will take some time to recover. The housing market has tanked in many areas, very much so in specific areas. On average, I would say we are looking at a situation where home pricess won’t be at their pre-crash levels for quite a while.
That’s our housing market, which already stabilized, plus a little bit of conservatism because I know there are some places out there that are even worse.
I think all the people who were going to lose their places due to unemployment, have – in our neighborhood and our social group, lots of folks are doubled up and have been for a year or more.