Spring 2010 may bring a perfect storm of falling demand, inflated home prices, rising interest rates and disappearing capital. (Photo: iStockphoto)
Although there are some glimmers of hope that a real estate turnabout is just around the corner, it seems just as likely that the coming spring could bring a storm of epic proportions.
That is why the next few months may be the best time to buy a house or investment property if you plan to finance the purchase. If you are one of the few who have gobs of cash on hand, it’s probably better to wait until the summer because rising interest rates and the home buyers tax credit won’t affect your purchases.
But for the rest, the time is now.
Time to buy
You hear a lot of economists saying the real estate market will likely get worse before it gets better. The spring of 2010 just may be the “worse” econs are talking about. And here’s why:
• Buyers battle it out. The home buyers tax credit has been extended to purchases under contract by April 30, 2010. The tax credit almost exclusively appeals to entry-level buyers, which means the prices of these homes will continue to be inflated above what they would be in a normal market. This is because the tax credit is forcing competition for houses.
• Disappearing demand? Although the tax credit has spurred buying, whether it is enticing enough people to purchase a home who otherwise would not have, is highly debatable — at least in the numbers to sustain a recovery. The fact is the tax credit results in the real estate market borrowing heavily against future buyers. When the credit disappears, those who were originally waiting to buy won’t be there. Just talk with your local car dealer about the impact of Cash for Clunkers.
• Rising rates. By the spring, interest rates will be on the upswing. Nobody believes rates will be where they are now, fluctuating just south of 5 percent. The consensus is that rates will be around 5.5 percent by March and could go as high as 6 percent by the end of 2010. Those are still pretty darn good rates from a historical perspective. But I’m not so sure they won’t be higher. Just as the tax credit manipulates housing prices, the mortgage interest rates have been heavily influenced by the Federal Reserve keeping the rate it charges on loans to banks at 0 to .25 percent. That will not be able to happen, especially if unemployment starts to fall as expected. This is because with falling unemployment and an economy on the rise, inflation will have to be addressed. The U.S. dollar is also at a 15-year low and the Obama Administration is going to have to turn that around soon. When the value of the dollar rises, so does inflation. And interest rates.
• Little lending? Another factor in the spring is how much money there will be to lend. The government is in the midst of a program to buy more than a trillion dollars in mortgages through Fannie Mae and Freddie Mac. This program is set to end in March, 2010. In essence, the government created a false bottom to the residential mortgage backed securities market. If the private sector is not willing to pick up that market at the same place when the government pulls back, there could be a tremendous shortage of money to loan and what is available will cost much more. The rate investors demand is determined by how much risk they believe exists. So, they will either demand a higher rate of return, which will cause interest rates to rise, or they will invest their money in something else, which will create a capital shortage and also higher interest rates.
If all of these elements collide in the spring, housing prices will likely drop, but that would be offset by higher interest rates, which may not matter because it will be extremely tough to get the few dollars that will be available.
We could very well see a perfect storm of falling demand, inflated prices in the entry-level market, rising interest rates and disappearing capital.
The best place to ride out that kind of storm is in your own home. So if you plan to buy one, now just may be the best time.—Rick Hazeltine