Tuesday, December 14, 2010

Are we at the bottom?

Research Firm Says Housing Currently Undervalued by 14% to 17%
December 13th, 2010

Today’s post contains a link to another article, which was first sent to me and other real estate professionals in Real Trend’s periodic email update on the industry. The article itself is from a web site called DS News.com, which bills itself as a site “delivering stories…impacting the mortgage default servicing industry.”

The article itself, as you’ll see, cites research by a group called “Capital Economics,” and it cites a number of other sources in arriving at the conclusion that overall, housing prices are now 14% to 17% undervalued “relative to disposable income per capita.” Low interest rates also play into the affordability mix. The point, as we’ve been saying for months, is that today’s buying opportunity is compelling. The article also muses over possible reasons why this record level of affordability hasn’t done more to spur sales. They finger the usual suspects: high unemployment, tight credit, and negative equity for many current homeowners.

We certainly agree that these are all factors at the margin, and will remain so for some time. We continue to believe, however, that plain old-fashioned fear is a bigger driver than any of the others. We continue to hear from buyers who are afraid to commit because they hear, or fear, that prices may fall further, and they don’t want to get in too early. While this widespread attitude may create a self-fulfilling prophecy in the short run, the fact remains that over the longer run, markets will always fight to return to balance, and a fundamentally undervalued market won’t stay that way for long.

We understand that, human nature being what it is, many people will wait until they see convincing evidence that we’ve reached the bottom before they take the plunge. In other words, they’ll wait until the bottom has passed, and then they’ll jump into a rising market. They may not gain anything by waiting, and may well lose a little, but they’ll feel better about it. We’re already seeing this phenomenon with relation to interest rates. 30 year rates have risen from 4.25% to 4.75% in the last few weeks, as we said they would. We’re starting to see buyer move to get in before they go higher. This may be the impetus to get prices themselves moving up soon, as inventories start to decline. In other words, the evidence is starting to mount that the “bottom” may have already passed.

Nick Woodard
Hodges and Fooshee Realty