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Housing Outlook for 2nd Half 2014
ing market impact on the economy with
the investment opportunity in housing.
There is no doubt that the pace of
home sales, relative to years past, has
slowed. This is predominately due to
tighter mortgage qualifying guidelines
and an overall shift in home ownership
rates. About seven years ago, the
home ownership rate was 70%, while
30% rented. Today, the split is 65% for
homeowners and 35% renters. This is
closer to a more normalized level. The
important point is that the decline back
to a more normal level has already
occurred, which allows for a more
stable return to historical appreciation
levels. And looking at housing as an
investment, the opportunity remains
very strong. We don’t expect the
double-digit rates of appreciation that
we had seen during the past couple
of years, but we do expect a more
modest, sustainable, and healthier level
near 5% per year.
Rental demand remains very strong.
Many of the new households being
formed have elected to rent. This has
put upward pressure on the cost of
renting. Over time, the added cost
of rents makes homeownership more
attractive and easier to justify. Clear-
ly, real estate is a very local industry.
Certain markets will dramatically out-
perform or underperform the national
averages. But one common theme will
be employment. The overall job market
has been improving and appears to be
gaining momentum. Those filing for
T
he mainstream media always
seems to have a negative bias
on housing. Let’s remember
that the media needs eyeballs to
generate revenue, and nothing grabs
more eyeballs than negative news
that creates fear. Just think about your
11 O’clock news report. But the news
on housing remains positive. After
we accurately called the bottom of
the housing market during my CNBC
appearances in 2010, prices have
continued higher. So where do we
see things going for the rest of 2014?
Let’s take a deeper look…
Demographics remain strong as
household formations continue to
outpace household completions. A
household formation is when an indi-
vidual leaves their parents to obtain
their own residence, or when a couple
gets divorced and now requires two
homes instead of one. A completion
is when a builder constructs a new
home. Essentially this is the supply
vs. demand equation for housing. It
has been a very reliable indicator for
the direction of home prices through-
out history. The forecast for the re-
mainder of 2014 and through the next
two years shows that household for-
mations should outpace completions.
Meaning that demand will outpace
supply. This suggests that prices will
continue to be supported.
The media often confuses the hous-
Realty411Guide.com
PAGE 87 • 2014
first time unemployment benefits have
dropped to levels not seen in 8 years.
Again, the job market supports a
healthy housing market. As discussed,
we are forecasting a 5% rate of appre-
ciation for the overall housing market
for the next year. While 5% may not
appear to be exciting, in reality, it is
extremely robust due to leverage used
in a real estate transaction. For exam-
ple: Imagine a $100k,000 home with a
20% or $20,000 down payment. If that
home appreciated by 5% or $5,000,
the $5,000 gain on the $20,000 invest-
ment (down payment) equals a 25%
return on your money. So, even a
modest 5% rate of appreciation can be
very meaningful to your portfolio.
It’s easy for the media to make
negative remarks towards the hous-
ing market. But the media is typically
on the wrong side of most market
moves. On October 2nd of 2002, the
USA Today headline read, “Where’s
the Bottom? No End in Sight”. This
represented the exact bottom and
turning point in stock prices, which
led to a five-year bull run. And back
on March 9th of 2009, with the Dow
Industrial Average just above 6500, the
Wall St. Journal headline read “Dow
5000?” You guessed it - this was the
exact bottom and turning point into the
current bull market for Stocks. The de-
mographics and economic conditions
suggest that this is still a great time to
purchase a home. v
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