Homes are more affordable now than in generations past. The American Dream of homeownership was based on the ideaology that your home was your biggest investment. Today's buyer doesn't necessarily see it that way.
I for one always aspired to own my own home and have done so since the early 1980's when I purchased my first home. It was a condominium that cost $70,000. A spacious 3 bedroom townhome in northern Westchester County, NY. At the time there was a recession and extreme inflation, and I made a deal with the owner/seller to take back a mortgage at a 16% interest rate. A good deal because that beat out the banks by almost 2%. Thats right! Can you imagine paying that much interest on a home with the current price structure. Do the math, it wouldn't work out for most home buyers, especially first timers. Oh, and I had to put up a 20% down payment.
Asking prices are dropping steadily, in fact they have done so for 60 straight months. This supports my initial statement that homes are more affordable now. Low prices coupled with historically low interest rates should bring out the buyers. But that just isn't the case. So what is going on here? Why are homes sitting on the market for so long. Certainly the glut of foreclosures has had an affect on the real estate market. Foreclosures do tend to need work and that brings extra expense to a buyer. So where are the buyers for the non-foreclosures out there?
To answer these questions, we have to look at the numbers. For instance, 78% of people surveyed by the Natioanl Association of Realtors said home buying was a good investment in 1992. In 1996 that number rose to 86% and fell in 2003 to 83%. In 2010 that number dropped considerably to 64%. Interest rates for conventional mortgages ranged between 4 and 5 percent in 2010. Home prices in 2010 were continuing to fall and currently still are falling. Where are those buyers?"
Nationwide median home prices in 2001 were about $168,000 and rose to about $235,000 in 2006. Yes, homes were a great investment back then. And thats the catch because investments are good as long as the arrow points up. The median home price has fallen to about $140,000 currently. Yes, helped by those pesky foreclosures, but help is as help does. So now homes are not a great investment. The arrow is now pointing down. Buyers should be buying them up like hot cakes. Not! So what is going on here?
There is a number called the Affordability Index which shows the number of people who are within the reach of homeownership. That number in 2001 was about 125 (out of 1000). In March of 2011 that number rose to almost 200. This proves that homes are actually more affordable to more people. We have prices lower, more people can afford homes and still buyers are scarce.
In 2001, the Homeownership Rate (percentage of households with atleast 1 homeowner) was at about 68% rising to almost 70% in 2004. In December of 2010 that number had fallen to about 66.5%. How can this be happening. It seems to defy the laws of economics and my humble sensibility.
What is happening? Rentals! I myself come from a long line of renters. I don't see any nobility in that, and growing up I learned that homeownership was the best way to build wealth. I also come from a very poor background so this idea of buying a home and building wealth was very attractive to me. I purchased that first townhouse when I was 22 years old and fresh out of the US Air Force. So now things have turned and renting is becoming a very popular way to put a roof over your head and avoid losses in real estate values. The numbers do not lie. In June of 2001 vacancy rates were at a low 8.25%. Then while real estate values were rising so did vacancy rates - to a staggering 11%. Then once the real estate values started dropping, so did the vacancy rate which currently stand at about 8.5%. Thats about were they were in 2001.
Now the rentals are filling up! And why not? There is a plethora of condos, townhouses and private homes available. Rental prices are agreeable. And the market is full of Generation X'ers ready to not invest in real estate. You see, they read these numbers and know what they mean. Generation X is one of the driving forces in this skewed real estate market. They are internet smart, have seen the collapse the real estate market and do not have the same beliefs that I have grown up with. The American Dream has changed. The bargains they look for are in other areas, other types of investments. Generation X is not hesitant to relocate, and they don't necessarily need to stay even in one profession. They are fully mobile and owning a home, especially in this market may only serve to hold them back from living their version of the American Dream. It is something to think about.
As a realtor in northern Westchester, NY, I have to think about that. You see, I stayed in northern Westchester, have owned my home for 15 years, lost money in this real estate market and do not plan to relocate. Darn it, I am a walking Baby Boomer cliche.
The most frequently asked question that most realtors deal with is - Has the market bottomed out yet? My answer is - That depends on the particular property and who is doing the selling. The foreclosures have certainly reached their bottom price. If you are looking for something that needs some work and if you can do the work for yourself, then that is your market. If you need to hire contractors to bring that foreclosure back to form, then you will be increasing your investment for a home that may continue to loss some intrinsic value. Again, that affects your idea of investment. Don't forget interest rates. If they start to rise in an inflationary environment, which we are in, then that will increase your monthly payment and thus decrease the attractiveness of that investment. More to think about because the waiting game may work against a buyer waiting for the bottom to arrive.
*Numerical data provided by National Association of Realtors, Bloomberg Magazine and opinions are those of this humble Baby Boomer
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