Whether you’re wishing to purchase your first home or considering an upgrade and you’re waiting to buy at the bottom, a number of indicators are saying that we’re probably very close.
Consider the 3 criteria that successful investors look for before investing- and this is in just about any market - stocks, commodities, real estate, collectibles - you name it:
1) Cheap Prices
2) The general public either hates it or at the least, they are ignoring it
3) Signs pointing to the start of an uptrend
Okay. I know that makes sense to you especially if you’re a contrarian. But what’s considered cheap? Well, I’d have to say that it depends on the investment but for real estate, I think we can juxtapose “cheap” with “affordable". One reason for the housing crisis of 2006 - 2008 is that homes prices in many areas grew to unaffordable levels for the people that lived in those areas. But today, home prices are more affordable than at any time since 1987 - that’s a a quarter of a century!
Now, I don’t want to just throw a fact like that out there without substantiating the it so let me explain.
If we agree that the 3 primary factors influencing housing affordability are median home prices, median household income & current mortgage rates, we can easily come to the same conclusion.
According to census.gov, (http://www.census.gov/const/uspricemon.pdf) the October 2011 median home price was $212,300. That’s just about 20% below the high of $262,600 reached in March of 2007.
Median Household income dropped to $49,445 at the end of 2010, the most recent government announcement. I think we can assume that it would be even lower today. But using those figures, we see that in order to purchase a home at the median house price, a family earning the median household income would have to spend over 4 times their income (4.29 to be exact). That number is very close to the historical mean. Back in 2006, it would have taken over 5 times median income to purchase the median priced home.
But when we consider interest rates, everything changes. As we well know, interest rates are extremely low... lower than they have been since the early days of this century. Using the average rate of a 30 year fixed rate mortgage and assuming a 20% down payment, we conclude that a family would take on a mortgage payment of $811 to purchase a median priced home. On an annual basis ($811 X 12 = $9,732) the mortgage payment consumes 19.7% of our median household income. I challenge you to find such a low percentage at any time in the past 50 years. But let me save you the time... you won’t find it.
I did find this chart which dates back to 1987.
Consider the 3 criteria that successful investors look for before investing- and this is in just about any market - stocks, commodities, real estate, collectibles - you name it:
1) Cheap Prices
2) The general public either hates it or at the least, they are ignoring it
3) Signs pointing to the start of an uptrend
Okay. I know that makes sense to you especially if you’re a contrarian. But what’s considered cheap? Well, I’d have to say that it depends on the investment but for real estate, I think we can juxtapose “cheap” with “affordable". One reason for the housing crisis of 2006 - 2008 is that homes prices in many areas grew to unaffordable levels for the people that lived in those areas. But today, home prices are more affordable than at any time since 1987 - that’s a a quarter of a century!
Now, I don’t want to just throw a fact like that out there without substantiating the it so let me explain.
If we agree that the 3 primary factors influencing housing affordability are median home prices, median household income & current mortgage rates, we can easily come to the same conclusion.
According to census.gov, (http://www.census.gov/const/uspricemon.pdf) the October 2011 median home price was $212,300. That’s just about 20% below the high of $262,600 reached in March of 2007.
Median Household income dropped to $49,445 at the end of 2010, the most recent government announcement. I think we can assume that it would be even lower today. But using those figures, we see that in order to purchase a home at the median house price, a family earning the median household income would have to spend over 4 times their income (4.29 to be exact). That number is very close to the historical mean. Back in 2006, it would have taken over 5 times median income to purchase the median priced home.
But when we consider interest rates, everything changes. As we well know, interest rates are extremely low... lower than they have been since the early days of this century. Using the average rate of a 30 year fixed rate mortgage and assuming a 20% down payment, we conclude that a family would take on a mortgage payment of $811 to purchase a median priced home. On an annual basis ($811 X 12 = $9,732) the mortgage payment consumes 19.7% of our median household income. I challenge you to find such a low percentage at any time in the past 50 years. But let me save you the time... you won’t find it.
I did find this chart which dates back to 1987.
So if we can reasonable assert that “affordable” could mean “reasonable” as regards to prices, could we make the argument that “very affordable” means “cheap”? If you agree with that assertion, then I assume you would come to the same conclusion that we have - Real estate is cheap today.
That takes care of our first requirement. Now let’s look at requirement number 2 - that an investment should be hated, or ignored. Well, let me ask you… when was the last time you saw a positive leaning real estate article in the news? When real estate does gets coverage, it’s been negative. And this has been going on for years now.
Let’s take a look at people’s opinions from the industry itself. The National Association of Home Builders Sentiment Index hit a bottom September 2011. Since then it has risen for the past 4 months. This shows that real estate was hated but is turning a corner. Which is what we are looking for as our 3rd requirement.
You can see the chart for the National Association of Home Builders Sentiment Index here - http://www.bloomberg.com/apps/quote?ticker=USHBMIDX:IND. YOu can clearly see that the index dropped like a stone from 2007 to 2009. It’s been trying to bounce back but has not had 4 straight months of increases for many years. So we see a reversing trend.
Now take take a look at this chart which shows median home prices for newly built and existing homes.
People aren’t talking about it yet but we're actually seeing an uptrend in new home prices. The trend (the 12-month moving average) is still down in existing home prices but if you look at the dotted line, you can see that we’re actually up last month versus the same month a year ago.
A few other personal observations: A real estate agent friend operating in the Tampa area can’t believe that there is any negative sentiment towards real estate at all. She says she is busier today (January of 2011) than she has been since 2006. On an even more personal note, my mortgage company Mortgage One is experiencing an increase in our Purchase to Refinance ratio. With rates once again bouncing along at all time lows, we have plenty of refinance business. But we are definitely seeing more and more purchase loan applications. A great sign. Plus our commercial division is extremely busy. If businesses are seeking financing, what does that tell you? It tells me that the economy is picking up and that is another push real estate can use.
In conclusion, if you were holding off until the market bottomed before you stepped in to buy real estate, don't hold off any more. It's time to put your money to work. While there’s always a chance of a “dead cat bounce”, our indications show that the trend is in the process of reversing itself.
By buying real estate now, you'll be buying at the best value in American history. By holding out to buy something just a bit cheaper, you may miss the best real estate deal you will ever get.
So if you're on the fence, get off it. It’s time to take the plunge.
Fair disclosure - I own a fair amount of real estate and if I can convince enough people that they should buy real estate, it may make my properties worth more. Here’s hoping!
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