Will it get worse before it gets better?

Everyone wants to know why the housing market in our area isn’t getting better.  With interest rates staying at record lows, and housing at now “affordable” prices, it would seem that we would be on our way to recovery.  However, there are “headwinds” that are slowing, or preventing, our progress:

 

1.       Inventories are still too high, and it looks like that will continue to be the case for quite some time.  In addition to the MLS “listed” inventory, we also have to plow through what is now being called the “shadow inventory”,  which consists of inventory held by banks and loan servicers that are not yet offered for sale, plus a large number of homes which are seriously delinquent on their mortgages (so they will become either foreclosures or short sales).. The shadow inventory is increasing as banks struggle to process all of the foreclosures and short sales, and once the processing problems are overcome, we can expect the listed foreclosure volume to surge.  We cannot move toward recovery until there is less inventory.

2.       Home prices are still unstable.  Although we are no longer in “free-fall”, they still continue to fluctuate, and currently the Las Vegas area is experiencing prices similar to those in 1999.  Anticipation of increased future inventory (as the shadow inventory is estimated to be approximately a 2 year supply of homes) puts downward pressure on pricing, and that becomes a reality as that inventory is released for sale.  The fact that over 70% of the homes in the Las Vegas area are “upside-down” (where the homeowner owes more than current market value) tells us that roughly 3 out of 4 homeowners that will sell their property will be in a  short sale situation.  So, it’s predicted that we are going to be seeing even lower prices on the horizon.

3.       The “Foreclosure Crisis”, an inquisition into whether or not the banks have been properly processing foreclosures, has slowed the foreclosure process, and therefore slowed the recovery process.  The true extent of the problem this has created remains to be seen, and should not be underestimated.  This issue is likely to place significant downward pressure on home prices for an extended period of time, which affects not only the housing market recovery, but also the economy as a whole.

4.       The “Employment Crisis” directly affects the housing market and the overall economy too.  Statistics show that over 40% of the unemployed have been unemployed long term (over 27 weeks), which implies that their job loss is most likely permanent rather than cyclical.  Housing related employment, such as construction, has taken the hardest hit with roughly a million jobs “lost” nationwide by the elimination of those jobs completely (roughly 8 million jobs were lost during the recent recession).  Las Vegas had a high concentration of housing related jobs, leaving a large number of people trying to enter different segments of the job market, or in need of relocation.  Our rising population is outpacing the need for workforce, and new jobs are not being created to meet the demand.  The combination of unemployment, fears of unemployment, and stagnant (and decreasing) wages for those that are still employed are all obstacles to home ownership, and do not support growth in our housing market.

5.       Difficulty in obtaining a mortgage is a challenge too.  Currently, stricter underwriting standards are impairing housing growth, but it was the relaxation of those standards that caused a lot of the issue with our housing market in the first place.  With more and more potential home buyers being credit impaired, and overall wealth declining drastically, we have more people “willing” than “able” to qualify to purchase a home.  The fact that the lenders are going back to the previous strict guidelines is ultimately good for the market in the long run, but in the short term, it slows the recovery too.

So, if you want or need to sell your property, or know that in the near future you will, waiting for a “better time” is most likely not the best course of action, as it will probably be quite a few years before you will see a significant improvement in your property's value.  For instance, if our market starts to recover in 2012, and can appreciate at a rate of 4% per year consistently (which is optimistic), it will take approximately 30 years for our property values to get back to 2005 levels.  You will most likely be better off financially if you bite the bullet and get it done.  Think of it as pulling off the Band-Aid; doing it slowly just makes it hurt more and makes the pain last longer, with no benefit.

A definite positive to the current market is the renewed opportunity for investing, for those who are able.  Investing in the now deflated housing market is recommended, as long as it is looked at as a long-term investment.  The days of the “quick flip” are, for the most part, a memory now, and we are back to the credo “The steady pace wins the race.”  Rental return on investment makes sense now, and the potential for long term appreciation seems possible again.  There is a lot of opportunity in this market, as long as you proceed with caution and realistic expectations.  Housing can never go out of style, because people will always need housing, and we keep making more people.