Is your home’s price about to fall 10% further?
Too few buyers with too many homes for sale depresses prices. Analysts foresee an additional 10% plunge — an opportunity for landlords and investors, but bad news for homeowners.
That’s what two respected teams of analysts are predicting right now. And TrimTabs Investment Research is more pessimistic, suggesting it could be five or six years before home prices stabilize and move higher.
Of course, this is just one more problem for investors and consumers to worry about. The economy appears to be slowing again. Stocks have ambled sideways since February. The U.S. government faces the prospect of a technical default on the national debt.
Cash buyers are becoming an increasingly dominant force in the market for distressed properties as financing gets harder to secure for potential owner-occupants. Not only that, but a steady drop in the homeownership rate has pushed down the rental vacancy rate as apartments and lease properties attract new tenants.
Rents are moving higher again as a result — pushing up the earnings yield of investment properties relative to financing costs to levels not seen since the 1960s. That’s creating a great profit opportunity for current and potential landlords. Paul Dales of Capital Economics wrote in a note to clients this week that over the next five years the rental market “will be a rare bright spot in the otherwise gloomy residential housing market.”
As for when we could expect to see prices finally stabilize and move higher, Zillow’s chief economist, Stan Humphries, believes that these cash landlords will play a critical role in getting the housing market to finally find a bottom. Next up would be second-home buyers and retirees. These are the kinds of buyers with the longest time horizons and the least sensitivity to price fluctuations.
Overall, Humphries is looking for prices to overcorrect to the downside as all the positive, bubble-era sentiment is painfully squeezed out. That, combined with improving economic fundamentals and a drop in the homeownership rate to historic norms around 64%, will be the green light indicating that the housing market is finally ready to heal.
But don’t expect big home-price increases, much less a return to the heady days of 2005 and double-digit annual price rises. According to Humphries, we’re not likely to see a “V”-shaped bottom where the rapid price fall is quickly reversed with a rapid rise on the other side. Instead, we’re likely to prices bounce around the bottom for a few years in a “U” shape before moving higher at a more normal rate of a percentage point or two above inflation.
Mark your calendars: Zillow’s brain trust, the guy behind those home price “Zestimates,” is looking for home prices to start rising again as early as 2014. But clearly it’s going to be a bumpy ride along the way.