When Will It Be Safe to Go Back into Residential Real Estate?
Experts across the nation have been predicting since the start of the year an orderly slow down to the unprecedented real estate boom of the past few years. Those same experts have been out in full force the past couple weeks claiming their earlier predictions of an orderly slow down to the real estate boom are being confirmed by recent data. Inventories are running at record levels, but on the whole prices are remaining steady nationwide. Sales are way down compared to the peak last summer. Homebuilders are beginning to offer incentives to unload their massive inventories. Investors are desperately trying to dump their overvalued properties on anyone willing to buy at a steep discount from prices found just a few months back. This brings up a huge problem with relying on economic statistics to see what the future might hold. Statistics we are seeing in the media showing an orderly slowdown in the housing market show what was happening several months back. It may be stated as June’s data, but depending upon the survey the information gathered might go as far back as last winter.
For the past year or so Financial Watch has been proclaiming there is indeed a housing bubble. All of the antidotal evidence we have seen so far only confirms our predictions of a bubble. We are only at the tip of the iceberg in terms of a housing correction or crash. One only has to look back at the dot com collapse to see it takes more than two months to call it a correction. It took one and a half years for the Dow to move out of its trading range after its peak in January of 2000. Bubble or not, we will know whether a soft landing occurred when we see housing inventories retreat closer to historical normal levels.
When will it be safe to move back into residential real estate? As in any crash it becomes safe to go back into an investment when the consensus believes there will never be a rebound. It is amazing to hear some economists proclaim that the U.S. is moving back into a normal market with home appreciations in the mid single digits. Expectations remain too high. Another sign it is safe to go back into real estate is when Congress starts to discuss legislation to prevent it from happening again.Later this year we will start to see concerns grow about falling prices and unsophisticated homebuyers locked into mortgages they cannot afford. Early to mid 2007, Financial Watch expects to see the most desperate sellers dumping properties onto the market causing prices to become depressed in local areas. Expect severe corrections to occur in the most speculative markets. Mortgage lenders will raise lending standards to limit their exposure to less than qualified purchasers. No money down loans will disappear unless seller financed. At this point we will know we are in the clear for a return to normal appreciations.
This may sound gloomy, but it will not be this bad in most markets. Most prognosticators predicting an orderly correction contend all real estate is local. This is true, but the bursting housing bubble will be felt nationwide.