On April 27, 2006 I had the pleasure of hearing Dr. David Lereah,Senior Vice President and Chief Economist of the National Association of Realtors, speak and give his thoughts about the current real estate market. Dr. Lereah was in Palm Beach on personal business and the Realtors Association of Palm Beach was fortunate to have him agree to address local realtors.
I was pleased to have the opportunity to hear his views. Many of the points that he made are aligned with the recent articles that I wrote and are posted on this site: “ Is there a Real Estate Bubble? “ and “Real Estate Bubble or Market Correction in South Florida?”
Dr. Lereah traced the recent boom in real estate to 1991 when interest rates dropped below double digits. This precipitated a refinance boom in 1992. Four trillion dollars of mortgage origination have been created since that time. At the same time, Fannie Mae and Fredie Mac overhauled their systems with new technology which streamlined the mortgage process and made it much more efficient. The Internet was expanding rapidly and a new model for searching and commutating property was born. Another factor, which occurred at the same time, was the 82 million “Baby Boomers Generation” which entered their peak earning years, and 40% of home sales were second homes. During the decade, immigration reached record levels and these newcomers wanted a piece of the American dream of owning their own home and real estate. These elements created “ A Perfect Storm” which propelled the real estate markets to record levels.
Even 911 had a positive dramatic impact on the market as “Baby Boomer” children sought the safety of placing their money in real estate that was a tangible asset they could touch and feel.
However, as market value appreciation hit 25-30% /year for the last four years in many areas of the country, speculators who forgot about cash flow and bet on appreciation were naturally drawn into the market in large numbers.
Dr. Lereah described the market, not as a bubble, but more appropriately as a balloon that was becoming over inflated and needed to readjust and let some air out.
The reality is that even though interest rates have risen, they are still below 6.75 % for a conventional 30 year fixed rate mortgage for an individual with a good credit history.
This is a far cry from the early 1990’ s when rates were in the mid-teens. Real estate still sold, but it was a slower process. Land is a finite supply and as buildable property becomes scarcer, the cost rises. In addition, construction costs have escalated dramatically over the last five years due to the increased cost of energy which raised the bar on new home prices. That in turn, pulls existing property values up the ladder along with them. Perhaps this is why we have seen a slowdown in suburban sprawl and gentrification, for example, the process of transforming an unprosperous neighborhood of buildings needing repair into a more prosperous one through investment in remodeling buildings or houses of many of our inner cities. This paragraph sounds confusing. I tried to clean it up, but you may want to try to make it into 2 or three clear sentences.
The economy is strong and the rate of immigration is at its highest levels. The Boomers, 77 million of them, are nearing retirement age and their children are entering their peak earning years. So even though there is more inventory on the market this year, and sales are down, this drop is relative in that they are down from record highs. A lot of new construction has hit the market all at once. The market is taking a breather and adjusting, not bursting or imploding. The economic laws of supply and demand have not been retracted and unrealistically priced properties need to adjust.
Yes, no one knows for certain what will happen with oil prices, interest rates or the weather, and how any of these factors will effect different investments positively or negatively. We do not have a crystal ball. My thoughts are that we are probably nine to eighteen months away before the cycle changes and supply becomes scarcer and prices rise, albeit at a more normal 5-9% per year.
