Will 2009 boom or will it be more doom and gloom?
Now you’re probably thinking: “A real estate boom in 2009? You’ve got to be kidding!” While the market may not exactly boom in 2009, there are a number of factors that may signal a dramatic improvement over the next 12 months. Here’s what’s happening that could make 2009 better than anyone anticipates.
1. The 10-year real estate cycle
All markets are cyclical. While markets differ dramatically, a 10-year cycle is common in many places. The Southern California market provides an excellent illustration. In 1960, 1970, 1980 and 1990, the real estate market was at its lowest point plagued by excessive inventory, foreclosures and short sales. By 1994, the market had stabilized from the downturn in the early 1990s. As market values were beginning to climb, the Northridge Earthquake hit. Extensive damage throughout the area sent the market into a tailspin. It took another three years for the market to stabilize again. The beginning of the next upswing began in earnest in 1998. The market peaked in 2005 — seven years into the cycle — and then began the current downward trend.
Given a 10-year cycle, California should be pulling out of the bottom and be on its way to a more normal market. This appears to be happening, despite the financial meltdown. The California Association of Realtors reported a 63 percent increase in sales in September. Radar Logic reports increases of year-to-year sales (2007 to 2008) ranging from a low of 16.3 percent in San Jose to a high of 74.3 percent in Sacramento. DataQuick reports that September sales were up from a low of 29.4 percent in Ventura County to a high of 106.1 percent in Riverside County as compared to September 2007. Mike Kelly of Keller Williams Sonoma reports that his market has only two months of foreclosure inventory and about four months of short-sale inventory. Foreclosures and short-sale inventory are rapidly being depleted in other areas of the country as well. As this inventory disappears, prices will stabilize and will eventually begin to rise.
2. Pent-up demand
Across the country, sellers and buyers have been telling their agents that they are waiting for the presidential election to be over before they buy or sell any real estate. Now that the presidential election is in back of us, the bailout is in motion and the most recent stock market plummet seems to have passed, look for a substantial uptick in buyer and seller activity. People still marry, have children, retire and have to relocate for their jobs. Many of them postponed selling or buying waiting for market conditions to improve. Look for this pent-up demand to make its way into the market in 2009.
3. The credit crunch eases
Credit is still tight. As one loan officer put it, “We’re back to qualifying buyers the way we did in the 1980s. If you don’t have a credit score of 740, forget it!” The bailout in conjunction with the new guidelines for FHA, Freddie Mac and Fannie Mae will result in more money in the system. Many credit unions are flush with cash and some are even making zero-percent-down loans to highly qualified buyers. As credit eases, buying and selling becomes easier. This will be particularly true in the jumbo market where highly qualified buyers are still having problems obtaining financing.
4. Inventory and days on market decline
The amount of inventory and the “days on market” statistics are the best harbingers of market changes. Prices always lag behind these statistics. When there is a strong seller’s market with upward pressure on prices, there may be only two or three months of inventory. Price stability normally occurs when there are six to eight months of inventory. Thus, when there has been a shortage of inventory, it can take 12 to 24 months before the market recognizes that there is an oversupply. The converse is true for a buyer’s market with downward pressure on prices. Unless you’re tracking inventory and days on market, you may not be aware of the shift until months after it started. Currently, inventory and days on market are dropping in many areas.
In 2008, the size of Gen Y (born 1977 to 1994) surpassed the size of the Baby Boom generation. Gen Y wants to own real estate. Some researchers claim that there will be a boom in the Gen Y “Mommy Market.” While members of Gen X (1965-1976) are delaying both marriage and children, the typical Gen Y mom currently has 2.7 kids. This population explosion is being lead by Latina and Asian women. Gen Y is just now beginning to hit their early 30s, the time when they are most likely to buy their first home. On the other side of the coin, baby boomers (born from 1946-1964) are most likely to buy a second or a retirement home between the ages of 50 and 60. While builders have cut back substantially on the numbers of new homes being built, an increase in future demand and a limited inventory will result in higher prices.
The question is not whether there will be another real estate boom — there will be. The real issue is how long it will be before it starts. Watch your local market’s inventory levels and days on market to see what your future will hold.