The Great Recession was just beginning to fade into history when voices started warning anew about a real estate bubble. Here's a closer look at the market.
The pain of the Great Recession is still fresh. It certainly challenged the maxim that real estate prices will always go up. But now, after several years of rising housing prices in the market, the question is: Are we in for another painful housing adjustment this year? It depends on whom you ask — and where you are.
First a big caveat. Real estate is very much a your-mileage-may-vary type of investment. Prices can go up in one part of the country while they go down in others. So, the housing markets in San Francisco and Flint, Michigan, for example, will look very different. Even within a particular region or city, price changes can vary from town to town and even from block to block. In short, you probably don’t want to make local real estate investment decisions based on predictions for how the market will perform nationwide.
Nonetheless, it is important to get a fix on the national picture. A number of market watchers say 2016 could see price increases slowing dramatically or even declining. Jack McCabe, a Florida-based real estate researcher, said on his website that we are already in the beginnings of a real-estate downturn.
“I expect to see them falling by the end of this year,” McCabe said. “We’re seeing tip of the iceberg indicators right now, and by the end of the year in many major U.S. markets, we’ll see price declines.”
He predicts the decline won’t be as severe as seen in 2008, and he expects it to be confined to higher-end units in major markets. Still, he advises caution.
“If you’re looking at buying, you’d be better off renting this year, waiting till later in the year, early next year, when you’ll see greater inventory, less demand, less competition and more favorable pricing,” McCabe said.
Housing analyst Marc Hanson agrees. He’s been arguing not only that the housing market is a bubble that’s about to pop, but also that the rental market is in the same situation. He looks at how much people make and reasons that there just aren’t enough people making enough money to sustain the housing and rental prices we’re seeing right now.
In October, Nobel Prize-winning economist Robert Shiller told Bloomberg that there could be a slowdown in price increases or retreat in housing prices this year. When he spoke he noted that in 2014 there had been 10 percent increases, which had dropped to a 5 percent increase in 2015.
“There might be a lowering (of the rate of increase) or possibly even declines in home prices in the next year or two,” he said in the interview last fall.
The cost of loans
Interest rates are likely to be another factor. As rates go up, buyers pay more to the bank, which means they’ll be able to afford less home. The Federal Reserve raised rates above zero for the first time since 2008, and many Fed watchers predict a series of gradual increases over the course of 2016. This prediction weighs in the arguments of those forecasting declines.
But there are a number of economists who don’t see a decrease in housing prices coming this year.
Svenja Gudell, chief economist at Zillow told Reuters in December that she’s an optimist about the market for 2016. She notes that millennials are just starting to enter the housing market, and they’ll continue to do so in greater and greater numbers.
She also points to a factor commonly cited by many who predict continued gains. There just isn’t much buildable land and new construction in the most desirable areas. People continue to move in, increasing demand, but the number of units available isn’t able to keep up, meaning the supply isn’t going up as fast as the demand. This, of course, tends to put upward pressure on prices.
Inman News, a source used by the real estate industry, interviewed six economists and noted last month that as a group they were “cautiously optimistic” about 2016. They each had very different takes on the possibilities: One predicted increased construction while another echoed the idea of a lack of enough new housing units – but on the whole, they expect housing to stay strong for the year.
With all that in mind, is it time to sell while the market is still hot? There are a number of factors to consider. First, where will you live if you do? Selling now, with the idea of renting somewhere else in town and then buying again if there’s a price drop is usually a bad idea. The prices would need to drop dramatically for you to be able to recoup the closing costs alone, to say nothing of the hassles involved.
But if you’ve been considering a move it may be worth some further investigation. Look at factors such as how much inventory there is, how long houses are staying on the market before they close and what prices have been doing for the past few months. You’ll want to do this in both your current and prospective markets to make an informed choice. Check out another of our articles for some more details.
What do you think the market will do this year? Will your region outperform or underperform the national averages? Let us know in the comments or on our Facebook page.