By Dave Jenks, Vice President of Research and Development and Jay Papasan, Vice President of Publishing and Executive Editor, Keller Williams Realty
Amidst fears of a financial market freefall, the real estate market is emerging as a bright spot. Indicators are pointing to an end to the bust; in fact, real estate may be poised for a bounce.
While consumers are scrambling to diversify their saving and investment accounts and retreating from paper assets (e.g. stocks) into hard assets (e.g. gold), the savviest among them are looking deeper than morning’s headlines and realizing that real estate is a solid investment option in the current market.
Home prices have corrected and fallen back into alignment with historic trends. The inventory of homes for sale is finally shrinking from the June 2008 peak. Also, based on year-over-year comparisons, housing affordability is now higher than it’s been for the past five years. All signs point to the real estate market turning the corner. So for investors seeking a safe haven in this financial storm, housing emerges as a surprisingly good choice—an undervalued hard asset with upside potential.
As the following chart illustrates, the unsustainably high run-up in home prices between 2001 and 2005 is coming back in to alignment with the historic 4 percent trajectory in home price appreciation. Indeed the market has corrected. While it is quite possible that the market will continue for a time to “over correct,” the important point to realize is that no one can ever predict or time the floor—until after the fact when opportunity has been lost.
Is Housing Headed for a Turnaround?
Source: Keller Williams Realty, Inc.
|The long-term affordability trend of 4 percent appreciation has been recovered after a five-year period of unsustainable growth (2001 to 2005) followed by a three-year market correction (2006 to 2008).|
Now is the time to buy and the reasons are many:
- Real estate remains one of the most stable long-term investments with relatively modest fluctuations in annual gains.
- The extensive housing inventory in most markets is providing great choices for investors.
- Mortgage money is available to financially stable buyers and interest rates remain attractively low.
- Real estate investments tend to bring a greater annual return on investment (ROI) than stocks, gold or commodities, because they are leveraged (buyers put 20 percent down, and receive appreciation on the entire value of the property).
- Just as the late 1980’s and early 1990’s provided a massive opportunity for real estate investors to make great buys and build wealth, the current market will do the same. Smart money is already back in the market buying up the distressed properties.
- There is a simple formula for investing in real estate – Criteria, Terms and Network. That formula and the step-by-step process for using it are clearly described in the best-selling book, The Millionair Real Estate Investor.