5 Factors to housing recovery
There have been many events in our history that have driven our real estate market to perform one way or another. However when you really break it down, there are 5 main factors that traditionally drive our market and will also be the same factors that will drive our recovery. The first 4 factors are things that are very easy to monitor and track: Housing Affordability, Job growth, Demographics and available credit. The 5th factor has always been a little more difficult to pin down (though not impossible), this is the “human” factor. Having an understanding of these 5 factors and their trends allow us to make reasonable predictions on how our market will develop in the near future.
Housing Affordability
As I disclosed in one of my previous posts (Is it still a good time to buy?), Housing affordability (ratio of median home prices to median household incomes) has dropped bellow the previous 20-year average. With housing prices now at pre-bubble levels in most parts of the country, the monthly costs of owning a home (including mortgage, interest, taxes, etc.) is now either equal to or lower than the cost of renting in many communities.
Job Growth
It doesn’t take much to make the connection between job growth and growth in the housing market. As income levels increase and more people are able to get back to working, this inevitably translates to more people with the ability to buy homes. However, this effect becomes compounded as stable job growth will also give many of the current potential buyers in the market the confidence to come down off the fence to start buying. Although current job creation is still below expectations nationwide, there are certain parts of the country that have seen significant growth in this area and can be used to demonstrate the power job growth has on our market.
Case-Shiller: Decline From Peak
For example: There has been significant job growth in both parts of Texas, and also Washington D.C. As a result, both areas are not seeing the same types of depreciation as the rest of the country. This is due to the increase buyer activity which is comprised of both local buyers, but also of buyers who are now relocating to the areas for employment. In fact, out of 20 cities tracked by Standards & Poor’s and Case-Shiller, Washington D.C. is the only city that has seen an increase in values both on a month to month and a year to year basis.
Demographics
Shortly after the housing bubble burst, we began to see a sharp decline in the number of new household formation. With the downturn in both in housing and employment opportunities we have been seeing children living at home longer, rather than leaving the nest to form their own household. This along with several other examples had caused the number of new households to rent or own a home drop to 578,000 in 2008, according to Moody’s Analytics. This was down from about 2 million new households in 2005. However, this number has recently begun to grow again, and reached about 950,000 in 2010. With the cost to build far exceeding the price in the resale market, new construction has been practically non-existent. With this lack of new inventory being created, the upward trend in household creation should eventually translate into a decrease of current inventory levels.
Credit Availability
Credit or the ability for a person to borrow is probably one of the biggest factors that can prevent a would-be buyer from becoming a home owner. Although there is plenty of financing available to buyer’s who can meet today’s strict qualifying requirement, financing options become all but impossible for people falling below this criteria. In addition, banks are currently pushing for even tighter standards and higher down payment requirements to obtain a loan. Although these restrictions may ease over time as lenders become more convinced that we are not going to see another double dip recession, in the short term you can expect credit standards to remain tight.
The “Human” Factor or Consumer Psychology
No matter what kinds of trends we are seeing in the other 4 factors listed above, we can’t expect any kind of recovery until the consumer feels comfortable enough to buy. Although there is still worry about how our market is going to perform in the short term, all other factors point to very promising reasons why buying a home now makes sense in the long term. However even with the long term benefits of buying, many buyer’s are still in a state of shock caused by our economic recession, and are simply just to scared to pull the trigger. Although 87% of people would prefer owning vs. renting, According to Fannie Mae only 66% of American’s feel buying a home is actually a safe investment. This is a significant drop compared to the 83% of American’s who felt this way in early 2006. This new fear factor will need to be overcome by a larger percentage of consumers before we can expect our recovery to start gaining any real speed.
Related Posts:
National Association of Realtor’s 2011 Outlook
Is it Still a Good Time to Buy?
Should you have any questions or need further information,
please don’t hesitate to contact me, (775) 220-1630
Or visit my website: www.SellingHomesinReno.com
Joshua Talayka
NAR designated: Short Sale & Foreclosure Resource
Chase International
Office: 775 850 5900
Toll Free: 877 922 5900
Cell: 775 220 1630
Fax: 775 850 5901
985 Damonte Ranch Pkwy, Ste. 110
Reno, Nevada (NV) 89521
Legal disclaimer: I am not an attorney, tax professional, modification specialist or credit counselor. The information contained in this article/blog is intended to provide general information on the subject and not to provide any legal, tax, or credit advice. You should not act upon this or any information without first seeking independent tax and/or legal counsel.
Source of Information: The Wall Street Journal
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