Thursday, June 9, 2011

When Will Happy Days Be Here Again?

The Economy: When Will Happy Days Be Here Again? - Knowledge@Wharton

This is one of the most comprehensive and honest articles I have read in a long time regarding the economy and the real prognosis for recovery.  I urge all my readers to take a few minutes to read it.  As it relates to real estate, I was drawn to the following paragraphs:

For Buyers:

"With the excess of supply and low prices, there is diminished need for new homes, and construction has dropped from about one million units a year in a healthy economy to about 500,000, according to Wachter. Commercial construction has also slackened. In the six recessions prior to the latest one, construction has been a key factor in the recovery, Wachter points out. Construction employment typically rises by more than 30% in the two years after a recession ends; in the two years since the end of the latest recession, however, construction jobs have fallen an additional 10%. "That is historically unprecedented," she says.

Bottom Line:  Aside from foreclosures and short sales and the issues, difficulties and delays that they entail, newly constructed homes represent a significant "sweet spot" for the shrewd homebuyer.  Developer/Builders are providing enormous incentives to move their projects to completion.

"The future may also produce a different housing profile. In 2004, the U.S. hit its peak in home ownership, with about 69% of households owning rather than renting. Currently, the figure is around 64% and likely will fall two or three points lower, to a level consistent with most of the post-World War II era, Wachter predicts. But there is some danger that the new normal could be even lower, she adds. That would mean a significantly higher portion of the population would be subject to the uncertainties of rent increases -- and cut off from the long-term financial benefits of ownership, a key to getting into the middle class and staying there."

Bottom Line:  If you are a potential buyer, the time is now.  Prices and interest rates are low. Inventories are high.  While lending practices are tighter, long term buying conditions are fantastic.  Home ownership, historically, has been a key component to capital preservation and socio-economic stability.  Don't buy a house as part of a three to five year plan to untold wealth and prosperity.  Real estate is a long term play.  Buy a home as part of an overall long term strategy to build a strong foundation of economic strength for yourself and your family.  Also, owning your own home should also provide a sense of permanence and stability for you and your family.  We've learned how bad it can get for those who buy above their means. Therefore, only buy what you can afford.  Finally, strive to pay off your home as soon as you can.  Avoid compounding debt by borrowing against your equity in the future.  Past generations had it right.  Debt, when it comes to your primary home, is not a path to wealth.   

For Sellers:

Federal programs have failed to keep as many troubled borrowers in their homes as the government had hoped, often because homeowners who do receive payment reductions later default anyway. Given all the problems in real estate, Wachter doesn't expect any significant improvement in construction before the end of 2013, indicating the new normal for housing and the economy will not appear until 2016 or 2017.

Bottom Line:  If real estate will not begin to stabilize on a national level for five or six years, and I have to believe based on all indications, it is likely to be true, waiting a few months to see what happens in the market may not be a wise decision.  Selling now may actually be more financially prudent.

Caveat:  National trend analysis is a "macroeconomic" exercise, while real estate is a "microeconomic" reality.  In my primary market (Coconut Grove and Coral Gables, FL), prices have flattened in most price segments and sales activity is very strong.  Every commmunity is different.  Seek advice from a knowledgable and experienced Realtor. 

For Both Buyers and Sellers:

In fact, the economy has been changing for decades, but in recent years the effects were masked by the housing bubble, which temporarily supplied lots of low and semi-skilled jobs in construction, real estate sales and mortgage origination.

Conclusion: Unskilled or semi-skilled real estate professionals are an endangered species.  The business has evolved into a proverbial minefield of challenges, and only those who know how to navigate through them will survive.  Maintain high standards in selecting a Realtor and /or mortgage expert.  They will make all the difference in your real estate experience.   

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