Sunday, April 27, 2008

Have we reached bottom?

Recent National Association of Realtor statistics indicate that the number of sales of U.S. existing homes rose slightly in February for the first time since July 2007. That begs the question of whether we have reached the bottom of this real estate correction.

Just as with the stock market there is not likely to be a clear indicator of when the real estate market has reached its low until we are past it. When I speak to my clients, I usually indicate two things. The first is that all real estate is local, meaning that what is going on in places like Florida and Arizona is not indicative of what is happening in Fairfield County, Connecticut. The second is that real estate, like the stock market, usually follows cycles.

In the past these cycles have been measured in roughly ten year time periods. Following that logic, and looking backward two decades, one could say that the real estate market rebounded from a laggard period in the early 70s with a rebound in about 1979 and saw large increases slightly beyond the stock market downturn in October 1987 until 1989. There was a correction in 1989-90 and then flattened for a few years until incremental increases began in 1991-93. Beginning in about 1994 increases started in single digits and rose to double digit amounts in about 1998 through 2006.

The stock market usually is a precursor of what will happen in the real estate market. If we look back three years to the spring of 2005, the stock market stood at about 12,200 (Dow Jones Industrials). Despite fluctuations, the stock market has pretty much lingered at those same levels since. Will the stock market see increases later this year? Typically that is what occurs after Presidential elections, and there are several stock market analysts who believe that the market is poised for a mini-surge to levels above 13,000 later this year, especially with continued low unemployment and relatively strong figures in durable goods, and low mortgage rates.

Part of the reason that there has been a slowdown in real estate sales is that despite decreases in the Fed rate, the banks have not followed suit by lowering rates. This means that in comparison to rates of 5.5% three years ago, versus 6.25% today, the cost of purchasing a home (if the cost of homes remained the same) would have increased by 12%. This corresponds approximately to the correction that the real estate market has seen in our values (despite average sales price increases due to sales in the high end). This has had the effect of having many buyers waiting on the sidelines for prices to fall further. If the mortage rates returned to those 5.5% levels, buyers whose buying power has not increased in the past three years would have that extra incentive to buy.

So we may in fact be in the flattening period that corresponds to the years '91-93 mentioned above. If that were true, expect real estate prices to start slowly increasing again late this year or in early 2009.