Good Article from today's Montgomery Advertiser

Now is not a bad
time to invest in
real estate

Written by

John Norris

 

11:32 PM, Jul. 9, 2011|

 

Q: With prices having fallen as much as they have, is now a good time to invest in residen­tial real estate?

A: This past week, I spoke to a real estate agent who assured me home prices weren't going to fall any further. They said it so convincingly, it is no wonder many people wonder whether now is a good time to do as you suggest: invest in residential real estate.

Last decade, we fooled our­selves into thinking real estate prices were solely a function of interest rates and available credit. It sure seemed like they were. However, anyone who has walked around long enough will tell you home prices also have a lot to do with population growth and location.

In essence, the residential real estate market is subject to the basic law of supply and de­mand. When the number of folks looking for a home is greater than the supply, prices go up. When the supply of homes is greater than the num­ber of folks looking for them, prices go down. It is kind of simple when you think about it this way.

 

The official home ownership rate in the country was 64 per­cent in 1970. In 1990, it was 64.1. Then, things began to heat up, as home ownership in­creased to 69.2 percent by 2004. Obviously, low interest rates, and an increasingly liq­uid secondary market for mort­gages, compliments of FNMA and Freddie Mac, helped to spur things along.

Not only had the population increased, but the percent of the population looking to buy a home increased as well.

It was a perfect storm. Yes, interest rates mattered, but the real key was the number of folks buying homes. Throw speculators into the mix, and, voila, prices skyrocketed. Where are we now?

Well, ownership rates have fallen back to 66.4 percent, which is lower than they were, but still pretty high by histori­cal standards. As a result, we probably shouldn't count on a large spike in this
measure to spark the housing market. We will have to content ourselves with good, old-fashioned, run of the mill population growth. So, demand probably isn't going to be quite as robust as many in the industry would like, for a long time to come.

 

What about supply?

When you add rental units to the mix, home vacancy rates throughout the country are still extremely high. There is currently a 6.2 month supply of new homes on the market, and a 9.3
month supply of existing ones, accord­ing to the most recent statistics. Further, at the end of the first quarter of 2011, the Mort­gage Bankers Association esti­mated 8.32 percent of all mort­gages
were delinquent in some fashion, and another 4.52 per­cent were in foreclosure. All of these statistics are better than they were, but they are still high.

As a result, you could make a strong argument there is a pretty good supply of homes on the market, with potentially more waiting on the sideline. If my neighborhood is any reflec­tion of the norm, I would be in­clined to agree with this. Yes, the number of Realtor yard signs has gone down, but there are still plenty of them.

When you add it all up, there is little in the foggy crystal ball to suggest a spike in home prices anytime in the near fu­ture. After all, that was what you really wanted to know, wasn't it? However, unless we have another financial panic like we did in 2008, the worst is likely behind us.