Writing and commentators are not known for using the term “guessing”. They use data to support their theories and ignore all facts to predict what the future holds for the economy, housing market, and most other areas. The public doesn’t want to hear wishy-washy “what if” discussions. They want concrete statements they can agree with or reject as a political statement. Investors want to hear from gurus in order to buy mortgage note or buy a house with high confidence that such actions are profitable.
Over the last few years, it has been obvious that forecasting both short-term and longer-term trends has become more difficult when government involvement is involved. When you are sailing into unknown territory, it is difficult to use past trends to predict future events. My view is that Wall Street firms have performed well in recent years largely because of their close connections with D.C. politicians, and their allies. The Fed’s massive injection of money and the pretense that the country is financially sound has almost entirely contributed to the so-called recovery.
This is true in few cases as clearly as it has been with housing. I am a mortgage note buyer and this is especially relevant for me. Housing prices have fallen by about 1/3 since the peak. The real estate market has seen positive changes over the past two years. Nearly half of all home sales in foreclosure were at their worst. This number is now down to 21%, less than one fifth of all homes (though short sales are still allowed). The national trend in home prices has been upwards, with skyrocketing being the most descriptive term for cities such as Phoenix and Las Vegas. Many of these cities have seen prices rise by more than 20% over the past year. CEPR (5/29/13) states that most price increases have occurred in the bottom third of the market. The prices in the lower third of the market have increased at an average annual rate 70% in Las Vegas and 50% respectively in Phoenix over the past three months. Los Angeles’ overall housing prices have increased 10% over the last year, despite the fact that unemployment is still high at 10% and real income declining. These types of increases are clearly not sustainable.
You should also consider other housing concerns:
- 11 million homeowners remain underwater
- Fitch, a credit-rating agency warns that rising interest rates and credit worries mean that gains in certain markets are outpacing the fundamentals
- Recent foreclosure regulations and the large number underwater borrowers have caused a decrease in housing supply.
- A few investment firms and hedge funds that have bought large numbers of properties in recent times are indicating that they will begin to withdraw some of their capital. Housing prices could be affected if this happens on an extensive scale.
What should you do if your goal is to buy a house to live in, or as an investment? I advise you to avoid price-volatile areas such as those mentioned above. There is a possibility of a near-term drop or stall. Although there are less dramatic swings in the price of houses in the rest of the country than in the US, it is still a smart investment. There are risks, but they are less than buying stock in the stock exchange, investing in gold, or losing value in your bank savings account due to inflation. You might want to consider buying soon if mortgage rates continue to rise.