April is drawing to a close and May flowers will be springing forth any day now. In a belated April Home Stand (sorry for the delay; we’ve been hard at work on some exciting changes we’ll be bringing to you soon), here’s what we’ll cover this month:
- Latest trends in Existing Homes Sales (Hint: Things are looking up… although Prices Are Still Down);
- The very real relationship between unemployment and home prices; and,
- Information about our upcoming press release
4.1% Uptick in Existing Homes Sales; Prices Off Slightly
If you’re waiting for a billboard announcing that it’s time to dive back into the real estate investing pool, this might be the sign you’re looking for. Pending home sales – a great indicator of the perceived overall health of the real estate market – rose by 4.1% in March.
The question some investors (and other real estate professionals) have is: Why does this matter? The short answer to this all-important question is that pending sales show actual market moves right now. Real estate transactions have a natural life cycle, and pending sales are reflections of what’s actually going on in regional real estate markets nationwide, as opposed to someone’s best guess about what could happen at some point in the future.
Multiple factors play a role in real estate’s slow return to health: (Click here to keep reading)
- Unemployment (for more on the role unemployment plays, see this month’s feature article for fascinating inside information)
- Interest rates
- Availability of credit
- Real estate prices
- Buyer confidence in regional/national real estate markets
Even though pending sales eased up in March, it’s important to note that real estate is currently throwing off mixed signals. Low interest rates are convincing increasing numbers of buyers to take advantage of great buying opportunities. The problem? For many buyers, credit is still tough to get. Because most buyers are unable to wrap their hands around the cash they need for real estate purchases, they rely on credit to finance transactions. As you can see, this can put a damper on purchase plans if financing isn’t readily available.
For those who can tap into cash, credit and/or investing partners – this is a good time to buy. Sales prices of existing homes dropped slightly (3.5% for the 12 month cycle that ended in February; off 0.8% since January). Keep in mind that prices are off sharply in some regional markets, while others are seeing modest increases. This illustrates the importance of doing your homework before making a purchase, and ensuring that any property purchased is either purchased below current market value, is throwing off positive monthly cash flow – or both.
In the end, mixed signals are keeping the market depressed. I’d like to say there’s a quick fix, but the reality is, there’s still a long way to go. Your best bet is to stay on top of the latest home price numbers and foreclosure data, especially if you’re investing in pre-foreclosure real estate.
Unemployment and Home Prices: A Direct Connection?
Home prices, like the unemployment rate, rise and fall. Recent research into this fascinating subject seems to support the idea that the two are inextricably linked. The American Institute for Economic Research compared home price and unemployment data over an extended period of time – nearly 20 years – and determined that a 1 percentage point drop in the unemployment rate yields a very real payoff in real estate prices: a 3.7% rise.
This study involved 20 major metropolitan areas, so these aren’t just highly localized numbers from one or two areas. Since many of the sample markets are located in different geographic areas, with vastly different unemployment rates, it makes sense that the results are accurate nationally.
Here’s a point to ponder with this study: In many ways, tying real estate prices to the unemployment rate makes sense. The reason? A higher unemployment rate typically means a smaller pool of available buyers for real estate. Since so much of the real estate market is tied to supply and demand, a buyer’s market is created when there are fewer potential buyers (and an almost unlimited supply of available properties).
Real estate prices aren’t really going anywhere fast right now, and this could be true for the intermediate term. Again, it comes down to unemployment. While the rate is undeniably falling – slowly – prices aren’t really headed up. In many cases, just the opposite is true.
I think it would be truly fascinating to analyze unemployment and home price data while considering the number of Americans who are underemployed, are working part-time and/or are no longer counted in the official number of unemployed because they’ve grown discouraged and are no longer actively looking for work.
Unemployed – or underemployed – people aren’t in the market to buy homes, even if they might be interested in making a purchase. Bankers, in the business of writing loans to people with a demonstrated ability to make timely mortgage payments (regardless of banks’ recent experiences to the contrary) have little incentive to take a gamble on loans almost guaranteed to fail. As a result, demand for mortgages and real estate declines even further.
Real estate investors are always trying to find the most accurate information available that will enable them to make sound investing decisions. I think there’s a very real correlation between the unemployment rate and home prices, although the impact may be more profound right now as the nation tries to recover from the devastating effects of the economic/employment/real estate disaster.
The best thing any investor can do before pulling the trigger on a purchase is to have a clear understanding of their goals, their options and how they’ll make money with an investment before spending a penny. Only then will they be ready to reap the rewards available in today’s market.
Keep your eyes posted for our next press release, which is coming in the very near future. We’ll give you the scoop on the Phoenix metro region, and tell you how this critically important market is faring as it continues its recovery