2007 Real Estate Market Outlook
You see lots of sell house by owner signs nowadays. Home sales fell 8.4% last year according to The National Association of Realtors. For those keeping tract, that’s the largest drop in 17 years. Previously there had been a 5 –year boom in the housing market coupled with a large appreciation in home valuations.
Many still expect higher real estate sales to continue although the greatest potential seems to exist currently in the rental housing market. Because of rising mortgage rates and the shortage of entry-level affordable housing, many potential homeowners are frozen out. Home shopper may be waiting to see how low those for sale by owner market values fall before they bite into the mortgage apple. Potential buyers are increasingly choosing to rent instead of owning.
Although construction and financing costs are below their peak levels, high prices and a housing industry slump keep new construction off the market. This all bodes well for the rental market. For the foreseeable future rising demand for residential real estate as an asset class among institutional investors is growing.
How far will the real estate sales slump go? It’s anyone’s guess. Many prognosticators are waiting for a 25% hit on the stock market to take place before the next run up. The stock market is still in a sustained bull market that could eventually see a reversal given upward interest rates and other factors. The U.S. dollar is in a precarious position considering large deficit holdings by nations not friendly to the U.S. Any attack on the dollar could accelerate a decline in real estate valuations.
But, there’s a scenario for possible celebration. What if Saudi Arabia, China, Venezuela and the other mostly unfriendly countries we’ve been buying oil from decide on purchasing U.S. real estate? They would be able to redeem their dollars, switch assets and be assured of a potentially more stable investment. Land may seem more real in their eyes and an unheralded real estate boom would ensue. They could buy gold, but real estate could be a better as the rent keeps rolling in.
A lot of negative news is on the horizon. Spending on Medicare and Medicaid, housing, social security, the war on terrorism and additional spending on the war in Iraq, the federal flood insurance claims from hurricanes and spending at record levels. Not to mention the budget deficit gets larger day after day and the number of years it will take to repay grows.
On the local level, state levels, property taxes are out of control. Ongoing partisan politics keep lawmakers from reaching an agreement on cutting spending. Most are addicted to a spending spree and have not the fortitude to plug the dam. Living within a budget and cost containment is not in their vocabulary.
The federal government has made a commitment to retiring baby boomers that threatens to cripple the system. The spiraling cost will overwhelm the whole economy, ultimately decreasing the purchasing power of the dollar and put the U.S. in a financial crisis.
Our trade deficit hovers around 7% of gross domestic product and our appetite for oil and cheap imported products is not waning. We prop up the dollar and plug the trade deficit by giving nations IOU’s in the form of Treasury Bills and these countries have a glut of them. In order to keep them interested in holding on to those Treasury Bill we have to keep the interest rate high which further swells the deficit. When are they going to get too nervous holding on to paper promises?
Which gets us back to real estate. Do they cash in and buy gold, roll with real estate or some other asset class or continue holding on to paper collecting bigger chunks of interest?
