"What Are Home Prices Doing?" - Thoughts from a Client Conversation

Spoiler Alert - skip to the bullet list below if you want the answer as I see it....

First, the background = I was speaking with a client yesterday May 12 (yes, I did see my Mom for Mother's Day, we went out Saturday since she had plans with my sister on Sunday); a buyer with over $500,000 in cash, which initially seems like a buyer outside the common challenges of finding and securing a reasonable property for their needs, right?

Bzzzzzzt! Thanks for playing, wrong, we have some lovely door prizes for you on the way out...

Survey says!  Bzzzzt.

Like all humans, this one has some fears - some legitimate, some likely out of proportion to the realistic risk of a certain scenario. As we all do, one of these concerns is if today's "deal" will result in catastrophic loss in a handful of years or less. Since people have short memories, and fear and loss stick stronger than positives and windfalls, I run into this often in regards to the crash of real estate from 5 or 6 yrs ago.

In essence, will what they buy today "crash" and leave them upside down? This is the root of the question, and it has some validity at all price points - after all, if the house you buy today drops to 50% of what you paid for it, that can be viewed as a loss or at minimum a liability instead of an asset as it was intended. No one wants to put themselves in that position if it can be avoided.

So, onward to answering the question!...

What Are Home Prices Doing?

 I Believe House Prices Will Continue to Rise in My (and Most) Markets - Here's Why!
First - it is POSSIBLE and somewhat likely there will be a tapering off, even slight decline as interest rates go up and the "print all the money we need" strategy gets dialed back (let's not go there this blog). A natural market adjustment, that won't be permanent, and will be healthy in the long run - just like putting a cast on a broken limb seems artificially restrictive at first (because it is), then can be removed once the limb is healed or even somewhat stronger than before.
Second, it is within the realm of statistics that we MAY experience yet another catastrophic crash in real estate. I do NOT believe that is going to happen - we've learned from the last one, and many, many factors I won't go into here are set to prevent that. Nuff said. Now for the good stuff:

• House affordability is at an all-time HIGH! - Interest rates are LOW, in fact, even if they DOUBLE they are among the lowest in recorded history. House prices are just now getting above replacement cost (the cost to build the same house on location), and have cleared the margin that new homes are on the market again for the first time in ~3-4 years.
• Major decline in distressed sales and foreclosures - 2012 saw the greater Phoenix market with about 40% of all sales in distressed (short, pre-foreclosure) position or lender-owned, first quarter 2013 has already dropped into the 30-35% range and that quantity is shrinking.
• Low inventory of homes for sale - People just haven't been listing their houses for sale, for many reasons. Supply and demand is pushing those that are for sale into higher price points, which in turn makes some of those previously unable to sell now in position to do so.
• Rise in price and demand of rentals - due to the previous crash, we have many renters that are far better qualified than historical tenants that can't buy yet, but will take better care of a property since they've been homeowners themselves. Again, a shortage creates a price increase yet yields higher returns, making this market the best time in the decade I've been in real estate to purchase a rental property and create wealth and cash flow.

For details on what this means for your individual situation, anywhere in the world, or if I've sparked you interest in investing or selling real estate, please contact me today. - JM

Make it a great day!