Were Home Prices the Next "Bubble"? We have a second chance to make a difference.

Real estate leaders  waiving reports claiming home prices are stable to rising might want to pause and read the  December 2004 report titled Are Home Prices The Next "Bubble"?. Authored by Jonathan McCarthy and Richard W. Peach, a VP of the Federal Reserve Bank of New York, this report took apart the warnings of analysts who saw a problem and tried to raise attention to it. McCarthy and Peach used their  credible analytical skills and resources to produce a 17 page document published in the December 2004 edition of the Economic Policy Review which concluded, "Our analysis indicates that a home price bubble does not exist." Nice work fellas.

Unfortunately for America their paper provided the talking points for politicians and real estate leaders.  Here's Barney Frank who in the Spring of 2005 said there was no bubble because the housing business didn't look like the dotcom bubble business. The Chief Economist of the National Association of Realtors gave us this quote in 2005,  "There is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors." When everyone is reading from the same script and the voices of reason are being drowned out by the marching band of brothers in banking, real estate, and government, we might want to proceed with caution.

Maybe we should turn the volume down and take a look at what it took for the real estate prices to run up to their peak,  and see if it's more probable that prices could be moving sideways or even down for a while longer.  Without complex formulas we can see the volume of buyers can not equal what existed in the first decade of the 21st century because (a) the real estate consuming  population has changed from massive Baby Boomers to much smaller Generation X andY, and (b) the lending rules have changed shrinking the pool of eligible people who might qualify for loans.

In Dane County, the consumer demand has changed. Condominiums, built to absorb the people who we assumed wanted apartment kind of living with the apparent advantage of real estate ownership, are being converted to rental units. And instead of building new condominiums, developers are constructing apartments.  The apartments are  being filled faster than they can be built. The "condominium buyer" has turned their backs on ownership and will remain renters indefinitely. Quality farm land was developed into low quality housing. This housing stock built in 2001-08 and sold at 100%+ financing has already been undermined by the houses built by the same developers who unloaded their land by selling new construction houses at a loss.

Housing prices will recover some of the loss in some areas of our market regardless of what mantras are are touted. But broader progress will be made when we let go of  short term profit strategies and spend our energy collecting resources to create solutions to upside down mortgages, foreclosures, empty homes, and unsustainable property tax rates.  The real estate industry, bankers, politicians, lawyers, economists have the talent pool to do whatever we value most. We can lead, or we can follow the past.

National Association of Realtors--A profile of home buyers and sellers

DID YOU KNOW?

According to the 2011 National Association of REALTORS (NAR) Profile of Home Buyers and Seller which surveyed 5,708 home buyers and sellers this summer, the average American home buyer has changed in the last year.

 

A shift in the age of buyers

The largest share of home buyers is aged 25 to 32 (27 percent), but this share of buyers is down 9 percent in the last year, a considerable drop for a group that continues to dominate the buyer pool. The median age of home buyers has jumped from 39 years old to 45 years old as first time home buyers have dropped to a third of all buyers, down from half of all buyers. (Predictable: Attribute much of this decline to the end of the tax stimulus for first time buyers)

 

A shift in buyers' incomes

The median household income of buyers in America is now $80,900, an increase in income after the previous two years' decline. (Predictable: A smaller percentage of the market going to first time buyers would cause the average income result to be higher)

 

A shift in married couple buyers

For ten years, single people were accounting for an increasing share of buyers, as married person's purchases dropped by 10 percent in that time. In 2011, NAR reports a drop in single home buyers. Married persons accounted for 64 percent of the 2011 sales, the highest number since 2001. 

 

This is worth noting: The trend of single women buyers making a mark in the market has slowed. Eighteen percent of home buyers were single women, the smallest share in six years.

 

The takeway

According to the 2011 NAR Profile of Home Buyers and Sellers, the average American buyer is now older, has a higher income, and is likely married. Single and lower income buyers are sitting on the sidelines as unemployment continues to concern the nation.  Home buyers are now "staying well within their means". Imagine that!

 

Why the drop in first-time home buyers? NAR 2011 President Ron Phipps notes that first time buyers had more challenging financial obstacles to overcome. Phipps said, "First-time home buyers fell from a record high of 50% in 2010 (Tax Credit induced)  to 37 percent market share in the past year. That's just about right where first-time buyer activity should be for the market to be in line with typical years. 

 

For more information, and to read 33 facts every Realtor should know about the NAR 2011 Profile of Home Buyers and Sellers,  click here.