Today’s real estate market is still struggling to recover from the massive downturn it has experienced since 2007, when prices were soaring, new home starts were booming, and home loans were being written left and right.
Since then, housing prices have dropped like a rock and the torrent of new home starts has dried to a trickle. The real estate market has been struggling to recover and gain some semblance of normalcy before rebounding in 2013 or 2014 as most experts predict.
With news that housing starts spiked in November by 9.3%, though, there are promising signs of improvement with new home construction. If this trend continues to grow, what impact will it have on the real estate market as it stands today?
Current Market Outlook
The outlook for real estate in 2012 is better than it was at the beginning of 2011 (and definitely 2010), but there are a few areas of concern that could still have an impact on the market’s success and growth, even with new housing starts.
High Foreclosures
Foreclosure rates in the country are expected to remain elevated for the foreseeable future, with no real, significant improvement emerging until 2013 at the earliest. This is due to hundreds of thousands of foreclosure properties being delayed by the foreclosure fraud scandal that broke in 2010 and still has not been resolved.
Foreclosures will further dilute the market, erode prices, and increase the gap between supply and demand. Buyers will have to choose between buying cheap home foreclosures or going the distance and building a new home from the ground up – that is, if more buyers can be found.
Low Buyer Demand
Even with dirt-cheap interest rates, demand will still remain stagnant. An avalanche of new buyers is not expected, primarily because people still have to qualify for home loans before they can take advantage of really cheap interest rates. And with banks still reluctant to lend in a hostile lending environment, there isn’t much anyone can do to defrost a frozen real estate credit market.
Positives in the Market
With the above being said, there are promising signs in this market.
Low Mortgage Rates
Low mortgage rates haven’t revitalized the industry – not yet – but they have helped, especially when it comes to boosting consumer confidence and helping take people one step closer to being mentally ready to buy. The spike in new home starts that came in November, 2011 can be traced to historically-low interest rates, a trend that is expected to continue throughout 2012.
Low Prices, Great Upside Potential for Investors
A wealth of foreclosures ready for the taking, all priced well below market value in a healthy economy, is still there for investors who have the capital to enter the market. Investors have every reason and incentive in the world to capitalize on such a high inventory, and many of them are – especially when housing prices rebound and profit margins turn into realized gains.
Banks Loosening Lending Standards
It may be hard to believe, but it is true – banks are making it a bit easier to obtain a loan (if only just a little). The key reason is because they recognize that low interest rates cultivate demand – and demand, ultimately, generates profit that overcomes the risk of eating losses from defaulting loans. Of course, this still makes it difficult for many to obtain a home loan; many qualified loan recipients today still need sterling credit ratings and usually a guaranty of some sort. But, buying in 2012 will be easier than in 2011.
The Impact New Homes Will Have on the Market
One of the main ways new home starts will impact the market this year is by helping to balance out various factors in the equation described above – such as foreclosures, prices, and other effects.
Foreclosures in particular could actually drop – at least, existing foreclosures that are currently sitting vacant. People who want to build new homes are beginning to demolish foreclosure properties and build new homes on top of their lots, which has a double effect on the local market. For starters, it immediately helps increase the relative value of surrounding homes. Additionally, it removes a blight – a home foreclosure – from the ledger of a bank, which makes it easier for the bank to lend.
Also, more new homes eventually will decrease overcrowding caused by vacant homes, which has intangible benefits of more aesthetically-pleasing environments (as well as potentially less crime due to criminals lacking havens).
In the end, the rise in new home starts is a very good thing for the economy. The jury is still out as to whether or not it will continue to increase, but for now, any positive sign is a one to enjoy.
