NAR reported homes sales dropped by 8.4% in 2006 from the frenzy of speculative buying in 2005. This drop is the largest since 1982. Is this the only comparison we can draw between the 2006 and the 1982 real estate markets?
In 1982 when interest rates went above 13%, in some cases as high as 15% or even 17% on home mortgages it created the problem of affordability. With rates so high it made house payments unaffordable for many buyers. Inventory numbers went way up, and so did “days on market” for listed property. It resulted in lower prices to compensate, a much slower market, and it took the market years to bounce back. Appreciation went backwards in many markets, homes were declining in value. Whole neighborhoods of new homes looked like ghost towns of vacant homes. The ripples of the slower real estate market went out through the jobs and materials manufacturing markets.
In the early 80’s many builders and developers went bankrupt; they were professionals, and by nature speculators. They knew the risks involved in their business. Today the type of real estate speculator is much broader than those professionals who know the market risks. The average profile of the Mesquite market speculator over the last few years has looked much more like “Mom and Pop” type investors.
Today the issue is not interest rates, but it is affordability. Interest rates are at or very near forty year lows. In the 80’s they lowered rates to help ease the pain. With inflation a primary concern for the Federal Reserve board, few knowledgeable people really believe they will lower rates much anytime soon. So affordability will have to be addressed at the price level, not rates.
Where does this leave the market today?
For average Americans homeownership is their largest investment and a very important asset in their overall financial picture. Much of the recently created wealth has already been pulled out of the property, through refinances, and equity lines of credit. More than one trillion in adjustable mortgages will reset this year bringing higher monthly payments. For many homeowners the last three years of market has felt like they just “hit the lottery”. Many more have become real estate investment guru’s equal to Donald Trump himself, just ask them. Much of the market of 2005/2006 was fueled by greed, poor judgment, uninformed decisions, and almost free money.
Inventories are growing along with current “days on market” for listed properties. Ultimately, supply and demand will level the playing field. Demand is always affected by affordability. Cash flow on much of the recent speculation properties will fall far short of supporting it, and will have to be made by the investor. In many cases this negative cash flow was not factored into their plan. If prices decline, given the recent increase in 100% financing, many more may find themselves up side down with no way out. Getting out could prove to be painful process; foreclosures are currently on the rise. Will the ripples go throughout the economy as they did before?
While many things are different and the economy appears to be strong, connecting the dots from 1982 to 2007 may be easier than many would like to believe.
What does this all mean to you, maybe nothing unless you work in a related industry, or are planning to buy, or trying to sell a property. For buyers it could offer you the luxury of time and real negotiation power. Sellers will sooner or later have to face the facts and price their property competitively in this new market.
For most of us working and earning a living in real estate in 1982, it was a year we would rather not be reminded of!
Mesquite GMAC Real Estate
Mesquite NV 89027