Where to Now for Real Estate Values?

This is certainly a strange time in the US housing market.

You have had an absolutely incredible bull run in housing values over the past 10 years. If you bought a home or apartment in pretty much any major urban area over the past decade, chances are that you have a sizable amount of equity in your home. With any bull run though, there is a tremendous amount of excess that will likely need to be wiped away before we begin the next leg up. There were way too many "funny" mortgages given out over the past couple of years especially as the housing market topped out and everyone wanted to get in. Everything from "liar loans" to teaser loans has created a situation in which you have a lot of people with no equity in their homes, and now they are watching as the values of their homes drop every month, and there is no one willing to buy.

Is there a top in the housing market? Or will we just work off this excess and simply keep moving higher?

I mean, a one bedroom apartment in Manhattan costs an average of $1.2 million dollars today. Try buying a house in San Francisco, New York, Chicago or Los Angeles. You are going to pay a fortune. Will a one bedroom apartment in New York cost double what it does today in 5 years, or will there finally be a top?

In the end, a house is just an asset like anything else. An asset is only worth what someone else is willing to pay for it.

I think that the current situation with the housing market will take a while to stabilize. There are so many foreclosures and liquidations hitting the market right now, and most Americans are already up to their ears in debt. Who is there that is left to buy? How can you justify buying a super expensive place right near, considering the deterioration of the mortgage market over the last few months?

I tend to think that the housing market will move largely sideways over the next couple of years. The big top in the housing market may come when the boomers start to liquidate their investments. The simple fact of the matter is that most of the Baby Boomers wealth comes from the homes that they currently live in. They will have pensions and a little money set aside, but most of their net worth is in their homes. They are going to sell their homes to contribute to their retirement funds, and then move to somewhere smaller, or perhaps buy an RV or something like that.

Who will be around to buy their homes? Most of the boomers kids won't be able to afford the million dollar homes that their parents will be selling. I believe that a major top in the market will come when boomers start to liquidate their homes. It seems pretty logical to me, considering the number of Baby Boomers that are preparing for retirement, and the amount of real estate investments that they control.

There will still be areas on the United States that will be great investments; I just think that as a whole, the major urban areas will be subject to a flattening out of values. Real estate values can't keep doubling every five years; it's just impossible. The last 5-10 years has been a statistical blip in the overall trend of the housing market. My advice is, if you want to own real estate, buy a place in an area that you really like and plan to live there for the next decade or so. Those who are trying to flip home to make money and just purchase for the short-term are bound to get burnt.

Filed under: Real Estate News | The Economic Meltdown