As I sit and read the never-ending doom and gloom portrayed by the media regarding the U.S. housing crisis, I have to ask myself, when will this be over? I decided to do some research to see if I could come up with some answers that might point to an answer.
I Say The Housing Crisis Is Almost Over
I began scouring the Internet for home values across the country and compiled volumes of opinions and information. My findings have led me to the conclusion that the housing crisis could indeed nearing the end. Let me re-state this in saying, the housing market may have finally bottomed out. This conclusion has been drawn not only from historical statistical analysis but also from hard data supporting values as stable or even improving in certain areas.
How Bad Has The Housing Crisis Actually Been?
Nationally, it appears that housing values have dropped an average of 10%-15% since the peak of the rush in July 2005. Also since July 2005, new home sales are off some 63%. New home construction starts has fallen more than 50% to the lowest it’s been since 1982 (Source: Wall Street Journal, May 6, 2008). Residential construction as a whole seems to be at a 15 year low, and could still hit the lowest level in history. So, the crisis we’ve suffered in housing has been bad, really bad.
How Did The Housing Crisis Happen?
To keep going, I need to cover how the housing crisis in the U.S. happened. The easy answer of how the housing market began to crash is too much supply and not enough demand. In other words, there were too many houses on the market for sale for the number of people looking to purchase them.
Bottom line is, when inventory of existing homes began to get scarce, housing prices began to shoot straight up! Sellers were getting more than their asking prices and they could pick between multiple offers. When new home builders began seeing this trend, they became very proactive. They bought larger and more parcels of vacant land and began building many more than their typical number of homes. It seemed like almost overnight, the market was flooded with new homes at great values. In an instant, supply exceeded demand, and prices began to fall. Naïve investors and builders alike were caught by surprise. There were just too many homes on the market and not enough consumers to buy them.
While the peak was great for homeowners who were able to sell their homes and cash in on the market run up. The run up was not so great for people in the lower and middle income brackets; many of whom were first time home buyers. Many of these folks were totally shut out of the market and unable to buy homes because they could not afford to buy so high. This further limited the demand for homes and eventually caused the housing bubble to burst.
The Housing Crisis Is Over? The Trend in Depreciation Is Slowing
Well, let’s be clear on a couple of things as I explain myself. When I say that the crisis has potentially ended, I am not saying prices are headed back to where they were several years ago. Values in the housing market peaked somewhere around the middle of 2005, putting us about three years into the market drop. When these prices peaked, they actually skyrocketed in certain areas of the country. The growth was so rapid, it wasn’t even realistic! There was no way the current level of appreciation in housing could have continued. Anything that goes straight up, must come down. Period.
Nor am I minimizing the problems that we’re going to face for a little while longer with the foreclosure problems stemming from adjusting mortgages. Although some folks might be able to get lucky and sell their homes with more activity in the buying market, many homeowners with these adjusting mortgages are still going to battle with increasing payments etc.
So, with these two conditions discussed, we know values won’t reach where they were in 2005 for a number of years to come. However, the trend in depreciation is not getting worse and values are holding stable in many areas. We are nearly three years into the crash of the housing market! Historically, when a downturn in the market happens, the depreciation cycle typically lasts 3-5 years. I see this cycle being closer to the three year mark.
Supply Is Finally Matching Demand
Like I said, I researched previous trends and cycles of depreciation in housing. “In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.” (Wall Street Journal, May 6, 2008). As the over-inventory of new homes has been depleted over the last 2-3 years, the demand is matching up more in line with supply.
By the end of 2008, new home inventory should be at seven months supply, based on the current trend. This is down from the current level of an 11 month surplus or supply of new homes. We should be at about a 5 month supply sometime during 2009, which historically, is the level where stability is achieved within the housing market.
With all of this, we should soon see an improvement in values within the housing market. We are already seeing a stabilization of pricing and a healthy adjustment of inventory. And while it’s true, the shake-up with the home mortgage industry has thrown another curve ball, this too shall pass. This isn’t the first housing crash and it won’t be the last.
Written By: Ben Johnson, Real Estate Developer, Arizona. This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
