Housing Affordability at a 50-year High: 2013 the Sweet-Spot Year to Buy or Sell Real Estate!

by arlene on March 6, 2013

newsletter2013_2_kenrosenRecently Dr. Ken Rosen was invited to speak to the agents of Red Oak Realty at a special company-wide event. His resume is impressive: he is Chairman of Rosen Consulting Group, Chairman of the Fisher Center for Real Estate and Urban Economics and Professor Emeritus at the Haas School of Business at the University of California, Berkeley. He was also formerly the special real estate advisor to the Davos World Economic Forum. Many remember him most vividly as the person who first predicted the housing market crash.

Dr. Rosen shared a detailed report on how the US economy performed in 2012, as well as projections for 2013. This small gathering provided a deeper understanding of the overall economic issues. This is a fairly data-rich post, but if you want the very brief summary it is: 2013 is likely to be the sweet-spot year for both buyers and sellers in this area. 

Here are some of the highlights of his talk:
There are many signs of improvement in the US economy: In 2012, US unemployment declined to 7.8%. Job growth is particularly strong in the Bay Area, with San Francisco ranking as the third strongest metro in job creation, and San Jose and the East Bay ranking among the top third metros in the US. But there are also drags on the economy, such as tax increases both nationally and in California, the continued Eurozone crisis, and geopolitical events in areas that can  affect oil prices such as Iran, Syria and Egypt.

The housing market has been an important, positive element of the US economy. Nationally, home prices are up 10% year over year, and in the East Bay prices increased 18% (Q412 vs Q411). The combination of low inventory (down 66% year over year) and high demand have driven up home prices, as have record-low interest rates. The question is not whether rates will normalize, but when. The Fed has sworn to keep rates low until unemployment reaches 6.5%. This may mean two years of “easy money” but 10-Year Treasury Bonds increased 30 basis points  over the past few weeks and are projected to grow further. This will push up rates on 30-year fixed mortgages, so normalization may happen sooner — and faster — than we think, ultimately doubling to about 6.5%. Dr. Rosen sees affordability at a 50-year high and recommends that buyers lock in a long term rate within the next two years.

Note: This is important as purchasing power changes as interest rates change. For example, if you can afford an $800,000 property at the current rate (3.875%), when rates move to 6.5% you’ll only be able to afford a $593,000 property (assumes 20% down).

The Fed is saying that current inflation is at about 2%, but in the long run it’s more likely higher at 4%. The last time we had high levels of inflation was 1978-1982 and during that time house prices went up steeply. Why? Because the best hedge over inflation is real estate. So while inflation is not preferred, it can positively affect home values.

For 2013, Dr. Rosen is projecting that GDP will increase 1.8%, unemployment will fall to 7.1%, home prices will grow 7% and the Dow Jones will reach 15,237. Jobs recovery, a stabilizing housing market, high savings rate and rising long term interest rates point to a 70% chance we will continue with a moderate but choppy recovery.

These forces are certainly playing out in our local real estate market. The first groups of buyers that revived this market were investors; those most likely to understand larger economic trends. So how does this affect you? Ultimately these questions have to be narrowed from global, to national, to regional, to local, and finally to the personal. And that’s where I can help. Is this the time to buy or sell, to refinance your mortgage, or to acquire investment property to preserve your assets? I would enjoy speaking with you about your future and how you can benefit most from the economic recovery.

If you are thinking of selling, right now is a remarkable time! There are many more motivated buyers than available properties. Homes that are well-presented and well-priced are often receiving multiple offers over list price. If you’ve been waiting for home prices to improve, this is the time.

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