Laurence Yun, the chief economist for National Association of REALTORS®, had plenty of positive news for REALTORS® at last month’s conference. Yun attributed much of today’s sub prime mortgage problem to greed. Wall Street wanted the 10 to 12 percent return that sub prime mortgages yield as opposed to the smaller returns from more traditional mortgage products. His take on the Wall Street types–“They gambled. They lost.”
Yun’s outlook for 2008 sees a shift from greedy speculators to serious homeowners. 2008 will be a year of opportunity where there will be serious, healthy business. Furthermore, Yun predicted that the market returns to normal by 2009.
According to Yun, one of the biggest mistakes that reporters make is talking about national trends. Nationally, 2007 was the fifth best ever year on record! Home prices declined about 1.5 percent after a 50 percent run up in prices.
The challenge is national numbers are pretty much irrelevant. Yun argues that talking about national averages is about as effective as having a national weather forecast. Like the weather, all real estate markets are local. In fact, you may have a buyer’s market and a seller’s market operating within a single market area based exclusively upon price point. Here are the other key pieces of positive news from Yun’s economic report:
1. New housing starts – Even though these are dropping, there was too much building. The market is simply adjusting to normal supply and demand pressures. The inventory is “being controlled which makes stabilization occur more quickly.”
2. Foreclosures – According to Yun, the 41 percent increase in foreclosures has resulted primarily from investor heavy real estate purchases in Arizona, California, Florida, and Nevada. The majority of these individuals are flippers whose investments did not payoff. More importantly, the number of foreclosures in Utah, New Mexico, North Carolina, and South Carolina is actually declining.
3. Under priced markets and Super Star Cities – Although the coastal markets are still overpriced, Middle America is under priced. Nevertheless, Yun cites a new trend termed, “superstar” cities. These cities will command premium prices, regardless of what the market does. There is so much wealth concentrated in these areas, that measurements are simply not predictive. In addition to London, Paris, Tokyo, and New York, Yun also identified San Francisco, Miami, and Seattle as potential new superstar cities.
4. The recovery has started – Other than the three states hit heavily by job losses in the automotive industry (Indiana, Michigan, and Ohio), the states that first experienced a downturn in the Northeast, are now in recovery. Specifically, Connecticut, Massachusetts, New York, and Rhode Island were the first to feel the slump and are now well into a recovery. Furthermore, there appears to be a pent up demand for first time buyer properties due to large number of Gen Y’s (born 1977 to 1994) that are now buying their first homes. Falling interest rates will motivate many of these buyers to step into the market now.
5. New jobs and corporate profits are still strong - For all the news about banks writing off massive amounts of mortgage debt, Citicorp took billions in losses and still was profitable in third quarter. Corporate profits are still strong with companies as diverse as Microsoft and Jack Daniels reporting close to record profits. Furthermore, the economy has generated 4 million net new jobs and wages are rising.
6. A weak dollar means more jobs and more real estate sales in the United States – Although going overseas or buying imported items will cost us more, the weak dollar means that American products will be 30 to 40 percent cheaper in Europe. Manufacturing jobs are returning to the United States. This also bodes well for the sale of U.S. real estate. Just a few years ago, the Canadian dollar was only worth 70 cents in U.S. currency. Today, the Canadian dollar has been hovering at about $1.05 to $1.10 U.S. What this means is that we can expect more Canadians and Europeans to be purchasing U.S. property, because our prices are approximately 50 percent cheaper than they were just three years ago.
7. Real estate: Still the best shelter – For those agents who represent reluctant first time buyers, Yun points to some interesting research from the Federal Reserve. Between 1995 and 2004, the average renter accumulated $4,000 in wealth. In contrast, the average homeowner accumulated $184,400. Furthermore, the typical homeowner holds their property for six years. Within this period of time, NAR’s research shows that approximately 97 percent of the homeowners will have a positive equity position after that period of time.
Bottom line: 2008 represents the best window that buyers will have to find excellent deals with excellent financing. Get the word out there. If they wait, prices and interest rates will be higher and the reluctant buyer may be forced out of the market.
Click the link below to download a pdf version of Dr. Yun’s presentation, “From the Roulette Table to the Closing Table: Lessons for Serious Buyers”