The Bright Side of the Housing Market


NEW YORK (MainStreet) — A recent survey suggests the housing market is on the upswing but still, it’s still nothing to sing about.

Released Sept. 21, the survey of 111 economists, real estate experts and investment and market strategists was done for MacroMarkets LLC, a financial data firm co-founded by Yale University economist Robert Shiller, known for the S&P/Case-Shiller Home Price Index. It indicates home prices could grow at an average annual rate of 1.1% from 2011 through 2015.

A 1.1% gain would be a dramatic improvement over the previous five years. From the third quarter of 2006 through the second quarter of 2011, prices fell an average of 7.1% a year. So the experts are, in fact, forecasting a turnaround.

Nationally, prices are now about where they were early in the last decade. For a little perspective, MacroMarkets notes that prices soared by 10.4% a year from the first quarter of 2000 through the second quarter of 2006. Prior to that bubble, home prices grew by 3.6% a year from 1987 through 1999, which was in line with long-term averages.

Unfortunately, the forecast suggests that people who bought homes during the housing boom, from the start of 2000 through the middle of 2006, may well remain under water for many years to come. What that means is that the people who were burned the most were those who bought during the bubble, while long-term homeowners have actually not fared all that badly.

Bubble buyers paid prices that were unjustifiably high. Their subsequent losses, while unfortunate, were not entirely unexpected, as home prices often fall back after a big jump. What was unusual in this case was that the bubble and collapse affected so much of the country; wild gyrations are typically confined to smaller pockets.

MacroMarkets points out that prices today are only about 6.8% below where they would have been if there had been no bubble or crash and prices had simply followed the long-term trend. That’s a little easier to live with than the fact that today’s prices are about 29% below their peak in 2006. Long-term homeowners have therefore not suffered anywhere near as much as those who bought in 2000 through 2006.

While a 1.1% annual gain from now through 2015 is obviously better than a loss, it should give prospective home buyers second thoughts. If homes will appreciate at only a third of their long-term rates, it will take much longer for a home to gain enough value to offset costs involved in buying and selling.

It would take almost six years, for example, for appreciation to cover the typical 6% real estate agent’s commission on a sale. Title insurance, loan-related fees and real estate transfer taxes can easily come to 4% to 5% of the home’s value, adding another four or five years to the breakeven period, for a total of 10 to 11 years, more than twice as long as buyers assumed in the past.

So yes, a gain in home prices is certainly better than a loss. But if the MacroMarkets forecast is correct, it doesn’t make sense to buy unless you plan to stay put for the long term.

Home prices are a good way to get an idea of how a local market is doing, but the numbers sometimes get skewed. Check out MainStreet's look at 5 Super-Expensive Foreclosures For Sale for an example!

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