4 Hot Real Estate Questions
Author: Jeffrey Lattimer Jr
Written On: Sun, 05 Apr 2009
Why are the Prices of Homes Dropping Substantially in Today's Market?
Prices are dropping because of the anomaly that occurred during the market boom. Research shows that home values appreciated 26.5% on average for the 20-year period from 1980 - 2000. In the six years that followed, average appreciation was 89%. Prices are now adjusting to the inconsistent and unsustainable growth that occurred during the first six years of this decade. In other words, THE MARKET IS NOT ON THE DECLINE. RATHER, IT IS MOVING TOWARD STABILITY, which will mean healthier markets in the future.
How do I Determine the Direction of Prices in My Market?
There are no steadfast rules to determine future pricing. Months' supply of inventory(total inventory divided by the number of homes sold per month) is a great guideline. A normalized or balanced market has five to six months of inventory. Based on this principle, if you have one or two months inventory, double digit appreciation is likely to occur. Lack of supply will cause potential buyers to clamor over the few homes that are for sale, which in turn drives prices higher. Too much supply and not enough buyers drives down prices. Current economic conditions also effect the direction of pricing, as pricing is directly connected to average income. Traditionally, the NATIONAL AVERAGE sales price of a home is two-and-a-half times the average household income (example, total household income of $100,000 - typical sale price of home would be $250,000). Through the BOOM YEARS, 2004-2006 that ratio was distorted, reaching up to four times the average income (example, total household income of $100,000 - typical sale price of home was $400,000)and sections of the country were even more distoted than that. We are now getting closer to the 2.5 ratio. However, with unemployment on the rise, prices may have to drop further to stay in line with the average American family income.
Why Should I Buy Now?
Any investment consideration, whether it be real estate, gold, or fine art, follows a predictable 9 stage cycle. First we have OPTIMISM (1), the period in which many people are excited about buying a home. When the market is strong, people's purchases quickly increase in value, which lead to EUPHORIA (2), which often leads to rash decision making. From the euphoria stage starts a downward cycle. As prices start to fall, buyers go into DENIAL (3). After denial comes FEAR (4) as prices continue to fall followed by PANIC (5), DESPONDENCY (6) and DEPRESSION (7). After depression comes HOPE (8)and then back to OPTIMISIM (9) to cmplete the cycle. The Euphoria stage is the point of Maximum Risk (Buying High) and the Despondency - Depression stages is the point of Maximum opportunity (Buying Low). We are at this point in many real estate markets today, even perhaps turning into the hope stage in some areas.
Is Homeownership Really a Good Way to Build Wealth?
According to the NAR, home values appreciate 4.5% annually on average. That's a great return; however, very few buyers pay in cash. Most try to put as little cash down as possible. The amount of cash buyers put into their home determines their return on equity, which is the total return on the cash they initially invested. So the return on equity can be astronomical. It's easy to see that real estate isn't just a good investment; IT'S A GREAT INVESTMENT!
Information obtained from Realtor magazine: April 2009 Addition
POSTED by: Jeff Lattimer Jr.
Any comments please e-mail: jeffreyslattimer@aol.com
