The old timers knew better. They knew the stock market couldn’t continue to return 30 percent a year forever.
And now, despite booming home sales, the death-knell is being sounded for the real estate market. A few people are already whispering in the wind that the price inflation we’ve seen around the country (from 60 percent increases in Manhattan to 25 percent increases in some Chicago neighborhoods, to 45 percent increases in certain areas of southern California) can’t continue.
Subtle signs of a market slowdown are popping up here and there. Sellers are receiving maybe one or two offers instead of a handful. They’re only getting their listing price, not 20 percent more. Is this the other shoe dropping? Or are the bears looking to move from Wall Street to Main Street, USA?
After three impressive record-breaking years, in a not-yet-over decade that can already claim the title of “best ever”; for real estate, it appears that the residential real estate market may be taking a breather. Not everywhere, and perhaps not yet in your neighborhood. But some markets are slowing down.
What’s happening here?
Interest Rates. Interest rates are the lowest they’ve been in about 35 years. Rates have dropped below the trough in October, 1993, when a 30-year fixed rate loan could be had for as little as 6.75 percent.
Today, you can get that same loan for less than 6.75 percent, with zero points, and no pre-payment penalty. Not a bad deal. If rates continue to drop, you’ll soon be able to get that same loan for less than 6.5 percent. If you’re in the 28 percent tax bracket, and you itemize, your mortgage will effectively cost you just 4.68 percent.
But as low as rates are today, many experts are predicting that rates will fall further in the months ahead. David Lereah, senior economist for the Mortgage Bankers Association of America continues to predict that rates will be even lower next year than they are today.
While people are getting new mortgages at an incredible pace, originations have slowed somewhat, although are still at record-breaking numbers. Are home buyers waiting for rates to drop before buying a home? If so, that could account for some of the slowdown. But it won’t last long. Once rates drop again, a rush of home buyers will enter the market, and the so-called slowdown will end.
Stock Market. Earlier this year, the media heralded the official arrival of the individual investor. Finally, editorials rang out, the average American had a larger percentage of his or her net worth in stocks rather than in home equity.
The stock market peaked in late July, and has since lost all of its 1998 gain and then some. If there is a real estate slowdown, part of the reason is the market’s wild ride, which has undoubtedly taken a bit of the wind out of people’s buying sails. When the stock market was charging ahead, home buyers could rationalize paying an extra $10,000 or even $100,000 for a home based on the fat feel of their stock portfolios.
If the stock market continues its wild swings (and you can expect a rough ride at least until the international markets calm down and possible through the next presidential election), it will continue to make home buyers jittery. Home sellers may decide to slow down, and wait to buy until they’ve sold.
The sooner international markets stabilize, and our own stock market starts climbing, the more quickly home buyers and sellers will regroup.
Politics. The 1980s ended with the real estate bubble bursting. The 1990s started with a recession and the Gulf War. While CNN broadcast the Gulf War live, everyone stayed glued to their television sets as nightvision lenses allowed us to watch air raids as if they were fireworks.
Meanwhile, real estate went into a tailspin. Nervous about the war, the recession, and the upcoming Presidential election, real estate agents found themselves with little to do.
Fast forward to today, and Americans are again glued to the TV, as Monicagate threatens to boobytrap Republicans and Democrats.
There’s an old saying in real estate that people don’t like to buy in advance of a presidential election. We’re in the middle of Bill Clinton’s second term, but the question hanging in the air is whether or not Clinton will be President as the new year dawns. If the old saw holds, it’s possible home buyers and sellers will take a breather until Capitol Hill stops playing politics and gets down to business.
Whether it’s interest rates, the stock market or politics, throwing a little cold water won’t put the fire out. But how much can you throw until the embers go out?