This week’s issue of Fortune Magazine proclaims the “return of real estate”. I didn’t think I would see an article like this from a mainstream publication so soon – especially from one of the most trusted financial magazines. Could this mark the beginning of more good news to come?
“Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing,” writes Shawn Tully.
The article covers five trends as justification for improvement in the real estate market:
- The steady decline in prices which has been going on nationally since 2005 has finally hit a level where it costs less to own a house than to rent in many cities.
- The supply of renters has increased sharply in the recent past, which has already begun to cause rapid increases in rental rates.
- Home builders have held back on building new homes for several years, creating the conditions for a shortage of new homes when demand goes up just a little bit.
- Investors, responding to the big demand for rental units, are rapidly buying down the overhang of foreclosed homes which has dogged the market.
- Finally, the U.S. economy seems to be on the path to improvement, although we still struggle with high unemployment and weaker-than-normal consumer spending.
Although I agree with the general points in Tully’s article, I have a few reservations:
- First, mortgage credit is still tough and only the best borrowers are getting loans these days. Investors and new home owners could help accelerate the absorption of excess housing inventory if lenders would loosen their qualification criteria slightly.
- We must remember that all real estate is “local”. Whatever is happening in San Diego, CA may be the complete opposite of another market such as Detroit, MI. There is a danger in analyzing real estate at the national level since there is no such thing as a “national” real estate market.
- Optimism aside, I believe there are still markets around the country that will see continued price declines of an additional 5% to 15% over the course of 2011. Real estate investors should keep an eye on those markets for future buying opportunities while investing in the stable and appreciating markets of today.
Clearly, we need to get back to a situation where market fundamentals drive a housing recovery, and Fortune claims that day is close at hand. However, until we see a significant improvement in employment (and income) in the private sector, there will be only marginal improvement in housing. It’s all about jobs and economic stability.
You can read the entire article here.