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Real Estate Investment
A real estate bust? Do you believe the hype?
By Arthur Hall
Senior Investment Advisor/Financial Planner, SGI, LLC
A real estate bust? Do you believe the hype? I think not!
Anyone that is affected in any way whatsoever by the real estate market and its changes is familiar with the current media deluge of negative information about the current market. All you hear these days is gloom and doom from most real estate prognosticators. Is this hype or the real deal? I believe the former. Our media is infatuated with perpetuating “new” and exciting viewpoints and is consumed with reporting sexy stories. A normalization of the market is not sexy but it is the truth. In fact, normalization isn’t even the correct term to characterize the current market. Real estate in 2006 is still experiencing one of the top markets in history. But do we ever really hear that? Bottom line is the market is strong and booming in many areas. I have compiled what I feel are my favorite clichés used in analysis of the current market and point out why many of them are either seriously flawed or simply incorrect.
Interest rates are the cause of the current bust.
Yes, interest rates do have a marginal effect on some buyers not purchasing that bigger home or making that first purchase but not to any great extent. Rates are historically better than they have ever been. The increases in the interest rates over the past year or so have only brought back normalcy to the real estate sector. But, rates are still not high. In fact, the 30 year rate has actually decreased of late and has risen less than one point in a year’s time. It also is not any higher than it was a short time ago during the expansion itself. We never hear about these two important facts. The fact that the conforming conventional loan amount has increased allowing higher borrowing amounts at lower rates is also never mentioned The relatively flat economy, low inflation and real estate market in many areas should stagnate the current trend towards the Fed ‘s continued raising of rates.
The market will bring about a recession that may last for years.
This will not happen. The unemployment rate is strong and the economy relatively stable and poised for future growth. If you look at the historic data, we have been in a relatively flat economic state of late. Sure, real estate has been booming up until last year but every other sector is underperforming. Just look at you mutual funds and/or index funds and that becomes quite obvious. We are due for a positive economic cycle boost in the near future which should propel upward the real estate market for the next few years. This boom may not start for a few years but it is bound to happen relatively soon. The two issues now holding the economy back are fuel costs and the war in Iraq. Both of these should be fleshed out, at least to a large degree, in the next 1-2 years or so.
Real estate was too expensive and had to come back to a normal state.
This is what pundits have been saying about the stock market and certain individual stocks for years. Real estate in many areas has been “overpriced” for years and will always be because there will always be individuals willing to pay the price for it. Sure, some areas will show decreases in price for a short interim. This cannot be avoided.
Buyers are using exotic loans to aid in purchasing and it will come back to haunt them.
Ridiculous. Everyone is saying interest only loans are dangerous to the average consumer. How do they figure? What a great deal….you pay only interest and if you want, in any given month, you can pay principal rather than HAVING to pay principal every month. Some negative amortization loans CAN be dangerous in the wrong hands but only if the borrower doesn’t understand them. If he does, they can work magic for cash flow for owners and investors alike.
Builders are seeing unprecedented buyer remorse and many are getting out of their contracts.
Yes, this is true for some builders in some areas, especially for narrow-market sized homes. However, many builders are still having great success selling their business and the slowdown has actual enabled them to do their jobs better. Of course, many builders don’t want it known that things are not too bad mainly because this information is bound to spur higher rates which eventually WOULD cause their sales to collapse. It is not in the builder’s best interest to profess things are too good, unless it is as hot as it was in which they just don’t care. In fact, builders are happy about the slowdown because many of the investors who they feel suck their profits have disappeared for the time being.
Housing has become too expensive for the average homeowner.
Not true, housing has never been more affordable for the average family. If they are in a high price area, they can do an interest-only loan and keep their payments lower. There are many options. Many people are open to rent-to-own deals which can benefit the buyer and seller in less-than-ideal market conditions.
Inventories are at an all-time high and it will take months for buyers to work through this inventory.
Of course there is more inventory than ever, in some areas. There is also more buyers and more of a demand and more of an opportunity to demand these homes. That is the way it should be. If inventory numbers weren’t high, we would have a housing shortage like never seen and prices would be out of reach for everyone. The real cause of the downturn relates to the psychology of the average buyer and seller. The media has perpetuated the slowdown through talk of it being inevitable. Also, the current market has help to skew current inventories through rental agreements or other forms of assisted ownership. This “skewed” ownership will help negate a large dumping of additional inventory any time soon. As these homes are slowly re-introduced to the market, their impact on inventories and sale should be negligible.
Many of these cliché statements one hears on a daily basis do have merit but only if they kept within the contexts of what they were intended to communicate. Constant references and comparison to the tech bust of 90’s are everywhere. The main difference is people do not HAVE to own stock, they DO have to own real estate, at least from a financial planning viewpoint. Renting makes no sense for anyone, period. These individuals selling their homes and renting until the market comes back are no better off than those trying to time the stock market. It just cannot be done to any degree of accuracy. Paying rent is like throwing money out the window every month. Better your investment to lose value than it have no value at all.
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