One rule of thumb when looking at how the Media covers Real Estate is to realize that typically they are 6 months LATE. Whether it's the booming of downtown condos or the recent adjustment in growth, the Media tends to sensationalize (fear sells!) and generalize.
Finally the word is starting to trickle out: Things aren't so bad after all!
Here's a recent article by Keith Harney - one of the Doomsayers himself- with a mea culpa about the current market:
Housing market looks more like a correction than a crash
Here are some other things to keep in mind when you take the long view of the Real Estate market:
- Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s. There have been few times when local prices declined. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.
- Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also larger transaction costs associated with selling a home due to the lengthy careful examination demanded by home buyers and sellers. Therefore, home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.
- Many non-quantifiable factors could be important for this metro market in determining home prices. Access to cultural life, the quality of museums, nearby local and national parks, water views, exclusive neighborhoods, weather, the international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.
- There are immense tax benefits to owning a home. These tax considerations were not considered in the analysis. For example, the 1997 law permitting primary owner occupants to trade down without having tax consequences. Also most home sales results in no capital gains tax. In addition, lengthier capital gains tax rates were reduced in 2003, thereby providing higher return for home investors. These positive benefits show an even stronger case for housing fundamentals in supporting home prices.
Another area we see the Media screaming about is affordability. Now this is an area that I believe deserves some scrutiny, especially when you consider that our Incomes have not gone up at the same steep rate (seemingly) of the local real estate market. It's easy to get caught up in hyperbole, so let's look at the facts.
Because home prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing marketbubble.
However, mortgage rates declining to historic lows have been a major force in boosting home prices in recent years. Recent higher rates are still at historically favorable levels. Lower rates allow homebuyers to obtain a larger loan without necessarily increasing monthly mortgage payments.
A more relevant measure for assessing the risk of a home price bubble is the median mortgage servicing cost relative to the median income. This ratio is near the local historical average. It implies no widespread financial overstretching to purchase a home in the region.
