Real Estate Outlook 2012

The only thing we know for sure about the real estate market is that it’s constantly changing. Therefore, no-one can predict with any certainty what will happen to real estate in the future–so I won’t try to do that. Instead, lets dig into some of the factors that heavily influence the real estate market so you can decide for yourself “What will happen with the real estate market in 2012?”

Everything has the ability to affect real estate and we cannot hit on all of them,so always remember to use common sense.

Unemployment may be the biggest factor. Current US Unemployment is 8.5%, while California Unemployment is 2nd worst in the nation (behind Nevada) at 11.3%.  While these figures aren’t nearly as bad as they were a couple years ago, we are still far from the 4% we would normally expect during a period of economic growth.

People cannot buy or keep their homes if they don’t have jobs, so as unemployment rises, you can expect real estate prices to fall. Unemployment always leads everything else, so it’s a great indicator. As the global economy heats back up and jobs are created, we will start to see prices rise again as more buyers enter the market.

Interest rates. Hopefully you’ve heard during the last 2 years, “Interest rates are at historical lows.” The average rate on a 30 year fixed rate mortgage is 3.91%. Rates have never been that low, and it’s a huge influencer of the “cost” of real estate.

When rates go down, more people can afford to buy homes. For example, if you bought a home today using a conventional loan with 20% down for $300,000, you would finance $240,000. Using today’s rate of  3.91%, the principal and interest payment would be $1,135 per month.

National Average Mortgage Rates

National Average Mortgage Rates

At the height of the market in 2005/2006, the average rate on a 30 year fixed rate mortgage was nearing 6.5%. The same $240,000 loan, using the 6.5% rate would require a monthly payment of $1,515 per month.

What does that mean for you? That means the same loan with today’s rate is $380 per month cheaper than a loan using an average rate from 2005/2006. This is an annual savings of $4,500.

With rates as low as they are today, how much lower can they really go? While we know the Fed will keep interest rates low for the foreseeable future, they really cannot go any lower. The interest rate environment today is a huge buy indicator.

Distressed real estate. In today’s market, distressed sales (REO’s, Short Sales and Foreclosures) put immense pressure on real estate prices. Common perception is that distressed sales are in some way “bad”. This is not always true, however, the perception of distressed sales in the minds of buyers is that they are for many reasons, less valuable than traditional sales. As a result, buyers offer lower prices on distressed sales than traditional. This means there are more comps on the market at lower prices, resulting in lower prices across the board.

No one really knows how many foreclosures are still coming, and there is really no way to tell. However, we know we have many years left of distressed sales influencing the values of real estate. Here’s why it’s difficult to predict what will happen with prices: we don’t know how many or how quickly banks can get through their distressed inventory.

Right now, things are moving slowly–banks are afraid to pull the trigger and sell assets at large losses. Someone who works at that bank has to sign the papers that approve a big loss. Many of the laws in place (at least in California) protect the buyer, making foreclosure and eviction a lengthy process. We do not know how many foreclosures are still to come. As long as banks continue to move through their inventory slowly, prices should remain relatively stable and should not “double dip” as many are predicting. This unfortunately means we will likely not see any price appreciation either. However, if banks are able to speed up the process, distressed sales will outweigh traditional sales in the market and force prices down further. Either way, we can tell if we aren’t at the bottom, we are certainly near it.

New Real Estate ConstructionLocation, Location, Location.  Real estate values are very dependent on location. In many places location is so influential that being on one side of a street can indicate a 20-30% price difference, or more. Pay attention to what new developments are going in certain areas.

Just because you are not a real estate person, doesn’t mean you cannot tell where “good locations” are. Businesses and developers spend big bucks on market research before opening new buildings/stores. They research demographics, traffic, trends, do surveys, work with government officials, all in an effort to choose the best location.

Often times local chambers of commerce can be a great help. Contact them and see if any new shopping centers, office complexes, or apartment complexes have been approved (or are in the approval process). If you are able to find out about a new fancy shopping center going up, that could be a good indicator of future economic growth in the area– which should cause real estate prices to increase.

Supply and Demand. It’s basic economics. If there is more demand (people who want to buy) than there is supply (people who want to sell) then the prices will increase as more buyers compete for fewer sellers. The inverse is also true. If there is more supply (sellers) than there is demand (buyers) prices will go down.

In today’s market there is far more supply than there is demand.  Millions of homes have been foreclosed on while millions more have been built and never sold which has increased supply. Millions of people have been foreclosed on, credit has dried up, unemployment is up, and people are scared which has decreased demand.

Real estate does not always increase in price. Plain and simple–real estate is an investment. Just like stocks and bonds, prices go up and down. During the housing bubble, many people thought real estate prices could only go up. Don’t get trapped in this thought process!  Prices can, and will, go down. Make a wise, educated investment to hedge your risks.

I cannot predict the future, and I’m pretty sure you cannot either. However, if you know some of the things that influence the real estate market, you can look for the indicators to buy or sell. Most importantly, work with a real estate professional who will help you navigate the market once you determine the right time to buy….and that time is NOW!

Author: Scott Mehlman

Sources: Bloomberg.com, HSH.com, BLS.gov

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  • Debi Drecksler

    Great article! I want to add one more thing regarding interest rates…If you already own property with a higher that average interest rate, pick up the phone and call your lender. There are programs out there that are NOT being heavily advertised and you might be surprised to find out that you qualify for one of them. I just lowered my interest rate with no fees at all! The qualifying factors were 1. I was never late with a payment 2. My credit rating is good. I believe that real estate will be a smart investment in 2012.

  • Mmehl12345

    Great explanations for a sometimes confusing topic!

  • Thanks Moms!

  • Thanks Moms!

  • Very good additional advice.. thank you Ma!