Home Prices Cheapest in 40 Years, but is ownership declining?

Estero – Bonita Springs – Naples Real Estate

Nationally-speaking, it seems like now more than ever home prices are at the lowest they’ve been in forty years according to Bloomberg BusinessWeek. However, potential buyers nationwide are taking the option to lease instead of Buy. But why? Especially when home prices are affordable for many that otherwise could not afford a home, specifically here in Southwest Florida. The point is why rent when you can own, right? It seems like a no-brainer. However, here are what some are saying despite the obvious good deals that are out there right now.

In the last few years, many have watched their home values get cut in half, and it is true that many people have lost their homes. It’s almost as if the American Dream of home ownership is slipping through our finders before our very eyes.

The most affordable real estate in a generation is failing to lure buyers as Americans sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent. But this would seem typical for a national housing market crash, wouldn’t it?

Unfortunately, the magnitude of the housing crash caused permanent changes in the way some people view home ownership. Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone, which may be a bit hasty. Never say never!

Worse Than the Depression?

Historically, homes have been a safer investment than equities. During 2008, the worst year of the housing crisis, the median U.S. home price declined 15 percent, compared with a more than 38 percent plunge in the Standard & Poor’s 500 Index.

Americans stay in their homes for a median of eight years, according to the National Association of Realtors in Chicago. Someone who bought a home in 2002 and sold in 2010 saw a 4.8 percent increase in value, based on the annualized median price measured by the group. The average annual gain in the past 20 years was 4.2 percent.

Falling prices have made real estate the best buy in at least four decades. Housing affordability reached a record in December, according to National Association of Realtors data that go back to 1970. The group bases its gauge on property prices, mortgage rates and the median U.S. income.

The median U.S. home price tumbled 32 percent from a 2006 peak to a nine-year low in February, data from the Realtors show. The retreat surpassed the 27 percent drop seen in the first five years of the Great Depression, according to Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate information company.

Not 100% Risk-Free

If we’ve learned anything, it’s that housing is not a risk-free investment. Everyone knows someone underwater in their mortgage or struggling to sell a home. About 11 million U.S. homes were worth less than their mortgages at the end of 2010, according to CoreLogic Inc., a Santa Ana, California-based real estate information company. An additional 2.4 million borrowers had less than five percent equity, meaning they’ll be underwater with even slight price declines, according to the March 8 report. The two categories add up to 28 percent of residences with mortgages. But when is purchasing a home 100% risk free? Even when the market was at its peak, there were still risk factors as with any home purchase.

Future Plans for Homebuyers

The share of Americans who said they plan to purchase a home in the next six months tumbled 23 percent in March, according to the Conference Board research firm in New York. The National Association of Realtors probably will say tomorrow that existing-home sales were at a 5 million annual rate in March, up 2.5 percent after a 9.6 percent plunge in February, according to the median estimate of 74 economists surveyed by Bloomberg.

Work began on 549,000 houses at an annual pace in March, up 7.2 percent from the prior month, figures from the Commerce Department showed today in Washington. The gain failed to make up for ground lost in February, when starts fell to the lowest level in almost two years.

The drop in homebuyer confidence may be temporary. Home sales probably will rise 4.1 percent to 5.1 million in 2011, with the biggest increases in the second half of the year, the Mortgage Bankers Association said in an April 14 report. In 2012, sales may climb 5.9 percent to 5.4 million, the highest pace since 2007, the Washington-based trade group estimated.

A rebound in home sales depends on the availability of jobs, the mortgage association said. The unemployment rate probably will decline every quarter of this year and next, falling to 7.9 percent by 2012’s end, the trade group said. It was 8.8 percent last month, the lowest in two years.

Improving Employment may be the Key

On the bright side, purchase activity will pick up slowly as the improvement in the job market eventually leads to greater willingness to buy.

Borrowing costs are at historic lows. The average U.S. rate for a 30-year fixed mortgage was 4.69 percent last year, the lowest in annual data going back to 1972, according to mortgage financier Freddie Mac, based in McLean, Virginia. The rate in March was 4.84 percent, the company said. By 2012’s fourth quarter, the average fixed rate may rise to 6 percent, according to the Mortgage Bankers Association.

However, if you can jump through the hoops to get a mortgage, and there will be hoops, then this is an amazing time to purchase real estate. There are going to be a lot of people kicking themselves a few years from now because they didn’t take advantage of the low prices and the low mortgage rates, despite the usual risks.

Tighter Lending

Cheap financing hasn’t done enough to boost home sales in part because lenders are being more selective with applicants, according to Federal Reserve Chairman Ben Bernanke. Federal policy makers have described the housing market as “depressed” in statements following their last eight meetings.

Although mortgage rates are low and house prices have reached more affordable levels, many potential homebuyers are still finding mortgages difficult to obtain and remain concerned about possible further declines in home values according to Bernanke said in Congressional testimony last month.

The share of banks reporting tighter mortgage standards in the first quarter rose to 16 percent, the highest since 1991, according to the Fed’s Senior Loan Officer Survey.

Federal regulators are proposing rules that may make lending even more stringent, including a requirement that banks and bond issuers keep a stake in home loans they securitize if the mortgage borrowers have imperfect credit and down payments of less than 20 percent. Borrowers who don’t meet the criteria would pay higher rates to compensate lenders for risk.

Fannie Phase-Out

As mortgage requirements rise, rates could follow as Congress and the Obama administration consider phasing out government-controlled Fannie Mae and Freddie Mac. The companies hold federal charters mandating they increase the availability of mortgages through securitization. In Fannie Mae’s case, that order goes back to the Great Depression, when it was created as part of President Franklin D. Roosevelt’s New Deal.

There are a lot of unsettled policy issues on the table right now that, if they’re not handled right, could further set back the housing market. Fannie and Freddie have historically lowered interest rates, and eliminating them will increase the cost of home ownership.

Lowest in Decade

The U.S. home ownership rate dropped to 66.5 percent in the fourth quarter, the lowest in more than a decade, according to the Census Department. The rate probably will retreat another percentage point by 2013, according to Meyer, of Bank of America Merrill Lynch, and Lea, the finance professor. That would put it back to a 1997 level.

All in all, people will still aspire to own their own homes, but they’ll just be a lot more practical about it. If you’re looking to buy in Southwest Florida especially, you’re still making a wise decision and you’ll be able to pick up a great deal! Just be sure to hire a professional Real Estate Agent who knows the area and can help you sift through the market and find a great buy!

By D. Michael Burke, P.A. Keller Williams Elite Realty

Michael@CoconutPointRealEstate.com/www.CoconutPointRealEstate.com