Real Estate Economist Sees Opportunity Until 2014
This week I was listening to a conference call with real estate economist Mark Boud of Real Estate Economics. He was offering insight to where the market is today and what we can expect in 2010 and beyond. I’ve put together some highlights of his findings and data.
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New home construction will be lower in 2010, 2011, and 2012 than it was in 2009.
Although new home construction was at or near a 40 year low, even less will be built this year. Boud’s prediction is that builders want to build, they just simply can’t get financing for it. He mentioned builders’ optimism is improving, which is what I discussed on BiggerPockets in a recent blog. It’s only until 2013 that new home construction eclipses 2009.
Interest rates will remain low until 2014.
Rates will inch up this year to average 5.7%, potentially seeing a spike higher than that if the MBS purchases end in March. However post that, rates will retreat as the market steps in. By 2014 he predicts rates to be at 6.7%.
Supply of homes will outpace the demand of homes until 2014.
There still is a significant oversupply of homes in the market. Equilibrium will not occur until 2014. This doesn’t mean that prices are going to continue to decline especially since prices have over-corrected.
Speaking of over-correction …time for appreciation?
The median price of homes nationwide is $175,000; however the supportable median price is currently around $250,000, according to Boud. Prices are 70% of where they should be because of an over-correction. However due to the low demand for homes it will take prices some time to improve signficantly.
Based on the information given by Boud, I view him as an economic optimist predicting a recovery in 2014-2015. In the near term he’s bullish on home prices predicting appreciation from price over-corrections and general lack of new home construction.
I’m a little surprised he’s predicting mortgage rates to only 6.7% by 2014. Shouldn’t this number be higher? The reasoning is limited risk for inflation over the next few years with a slow chugging economy. The one factor which could cause interest rates to increase even without inflationary pressures is the reduction of available funds for the US Government to borrow from foreign countries. Currently, China is filling this gap by purchasing US Treasuries. If China decides to change its policy on buying US Treasuries, all bets are off on Boud’s rate prediction. For you conspiracy theorists out there here’s an article from Reuters discussing China selling US Securities as potential economic weapon.
For those of you who believe we have no worries, you’ll probably find comfort in Tim Geither’s statement last week debunking both Standard & Poor’s and Moody’s concerns the US will lose its AAA debt rating. “That will never happen in our country”, Geither said in response to an ABC News interview regarding a potential credit downgrade for the US. So as long as we have a good credit rating, people will keep lending us money and we can keep building deficits and financing our economy.
The real underlying message of all of this, especially Boud’s sentiments, is a declaration of a buying opportunity until 2014. This doesn’t mean everywhere. He placed special emphasis on boomlet areas where there is little to no housing construction or areas where there is no more room for construction. On the other side, if you’re holding right now expecting steep price increases in the next couple of years, you’ll have some waiting to do.
Image from RealEstateEconomics.com