People are always asking “where is the market going?” It’s tough to say but there are strong indicators that suggest that we are not out of the woods yet.
Yesterday, Case Schiller released their latest report. Despite citing smaller declines in January, don’t be mislead. If you think housing prices have reached a bottom, hold on. They haven’t. While the declines are smaller, they are still declines. Some market indicators are actually suggesting that there will be another significant drop in housing prices of 5-15% depending on region. We can only hope that the Philadelphia market will be on the low end of those estimates.
I believe that what we are seeing nationally is a false-bottom propped up by tax credits and artificially low interest rates. Once the $8,000 first time buyers tax credit goes away at the end of April, true reflections of the market will begin to appear. This will drive down the demand from those taking advantage of the program, driving up inventories.
Another factor that contributes to this false-bottom is the growing numbers of foreclosures that are still in the system. RealtyTrac’s Year-End 2009 Foreclosure Market Report shows that were approximately 2.8 million U.S. properties in some stage of the foreclosure process in 2009. That number is up 21% from 2008. Earlier this month RealtyTrac reported another 308,524 homes entered the foreclosure process in February 2010. Once these properties hit the market, along with short sales, the face of the real estate market will change as will inventory swells. (Keep in mind that on average, foreclosures sold at a 15% discount and short sales a 12% discount, in 2009.)
If all that was not bad enough, factor in the lack of available financing. Banks and lenders have pulled back and raised the bar to obtaining financing for purchases. With fewer buyers qualifying for mortgages, it will further drive down prices as fewer dollars chase an ever expanding supply of housing.
Interest rates have also been inching upward. Higher interest rates will traditionally hamper housing sales, resulting in even more pricing pressure.
If artificial market influences (tax credits, low interest rates and forestalled foreclosures) are allowed to prevail, the market will continue we will see a less than accurate representation of the real estate market.
If the laws of supply and demand are left unfettered and the “training wheels” are taken off, the number of available homes increases, prices will continue to fall. It’s simple Economics 101.