When Will the Real Estate Market Normalize?
A crystal ball would be handy here. While nobody knows exactly when the current correction will stabilize, there are a few fundamentals to watch.
Real estate is still a regional game. The prices, fluctuations, and sales data vary widely by demographics, employment, and infrastructure. There are several large economic factors which sway markets. They are worth watching and are in no particular order.
1. Absorption. There is an excess of inventory in many markets. With thousands of unsold homes by builders and many homeowners wanting to sell, there is more supply than demand. The result is that prices will not appreciate so long as supply exceeds demand. Watch the days on market for homes for sale and builder inventory.
2. Financing. In the last 5-7 years we saw lending institutions lose their professionalism. With the country awash in money, 110% mortgages created irrational exhuberance that has now helped to create the largest foreclosure market since the great depression. The correction in the financial markets is a very complicated issue and has amplified the housing crisis. Interest rates are one indicator. But, the resale of loans into the secondary market is equally important.
3. Employment. If people are out of work, they can’t qualify for a loan. This key statistic drives commercial real estate AND residential and is easy to monitor.
4. Infrastructure. If the community and government provide basic services and maintain roads, airports, and utiliities, then business tends to stick around. When the local and regional governments feel the pinch, businesses look elsewhere to run their shops.
5. Permits. Many builders know all of this information and then some. If permits for new construction increase, that may be a sign that the turnaround is coming. A decline in permits means that we are still on the backside of the boom-bust curve.
All in all, many pundits are saying that the housing market won’t stabilize for 2-3 years. There are permanent changes in our economy that make that prediction even fuzzier. We have survived wars, inflation, and recessions before. We have never had an accelerated energy cost spike like this before. Gas prices affect everything and many economists don’t see those prices retreating very much any time soon, if ever.