Ahead of the busy spring months for home sales, it's safe to say the housing market is more stable than it's been in years--and some see it heating up even more as winter ends.
Still, there are some creaky foundations underneath this real estate recovery, despite stories of bidding wars in some places and buy-now-or-miss-the-boom talk from real-estate agents.
Housing data is strengthening and many economists predict the trend will continue, albeit at a modest pace. A U.S. Commerce Department report Thursday showed homebuilding rising at the fastest rate since the summer of 2008. Earlier this month, the widely watched Case-Shiller home price index showed that U.S. home prices rebounded 4.3 percent for the year just ended.
"Prices are starting to bounce back from a very low level and it's pretty safe to say we have hit bottom," says Tim Courtney, chief investment officer Exencial Wealth Advisors in Oklahoma City. "It's a still a slight recovery from a very painful downturn and I would not say it's raging 'buy.' But I would say it's a relatively good time to buy real estate."
Any sign of improvement is welcome, as many economists note that a real recovery in everything from consumer spending to unemployment is difficult when housing is still on its heels. Still, risks remain in a housing market that has gone through a huge trauma. Here are some of the biggest questions behind the "For Sale" signs:
1. How affordable is housing? By some measures, homes prices are a steal right now. The Housing Affordability Index shows that homes are cheaper than they have ever been, according to the National Association of Realtors. The index might be deceptive, though, because it figures only the average salaries compared with home prices and financing costs. With interest rates near all-time lows and rents rising steadily, the reduced cost of mortgages would seem to be an easy option. So why aren't more people taking that route? Credit checks disqualify many potential buyers, and the no-money-down loans of the past have disappeared. Add in a 10 to 20 percent down payment, and affordability becomes more of a challenge.
"For a lot people living between the coasts, people are not doing great financially and don't have the kind of job security to feel confident to take on the kind of debt needed to buy a home," says Kevin Finkel of Resource Real Estate, which manages distressed real estate assets. "For the other 25 percent, things look better and better."
2. Have financial markets gone too far in buying into the housing recovery? Real estate investment trusts (REITs) have boomed over the past three years, outperforming almost every other financial asset. Even the biggest proponents of REITs say the best gains have already been made. The same can be said of homebuilder stocks. These investment gains may be built on an overly rosy view of the future. Still, REITs should generate higher total returns than bonds, and probably with slightly less risk because they tend to do well as inflation rises, according to housing investment analysts. Bonds lose value to inflation.
For those who want to roll back the clock and find bargains, the housing market in Europe is probably a year or more behind the U.S. recovery. Courtney says Dimensional Fund Advisors (DFA) and Vanguard both offer international real estate funds that should yield more than twice the 3 percent average yield of U.S. REITs.
3. Why does real estate always look greener somewhere else? It's not all in your head. Housing remains an uneven market, and some parts of the nation have been left behind in the recovery. What's more, there are cities in each part of the country that have managed to hold up better than the rest of their region.
Such geographic differences in real estate markets are not new, of course, but they appear to be widening, partly because the early 2000s saw speculative excesses and overbuilding that still weigh on states like Florida and other Sun Belt markets, says Finkel. But it also reflects a long-term trend in the economy in which quality jobs cluster around the cities, university towns, and urban suburbs. Those places attract better-educated and more-nimble workers in a global economy. "They tend to be in cities like New York, Washington, San Francisco, and Los Angeles. Those real estate markets are good."
4. If you really want to buy, where are the bargains? On paper, it's not hard to find apartments and other real estate that appears to have a positive cash flow. Some people have been putting cash into foreclosed properties that have been underpriced, although it's a difficult science requiring money, patience, and careful analysis. Banks still own some $30 billion of foreclosed properties, but in many areas, the much-touted foreclosure market is picked over and probably not the best place for non-professionals to find deals, says Andrew Gorczyk, a portfolio manager at Signature. Still, for wealthier investors, there may be opportunities including what Gorczyk calls "country club investments," in which a group of buyers scout properties and chip in $10,000 to $50,000 for apartments or other income-producing properties and private equity funds.
5. Should homeownership be part of your financial plans? An entire generation entering the working world is facing bleaker job prospects than any time since the FDR-era Depression. Says Finkel: "We may have reached a plateau in the single-family home market. Young people are not buying." But there is no clear evidence to prove that the rent-not-buy trend will stick. To be sure, renters have been reluctant to put their savings at risk by purchasing homes. But they are also unnerved by rising rents, says Gorczyk. Some worry that prices may rise to unaffordable levels and they will be locked out forever. But there appears to be no reason to have "buyers' panic." Prices appear to be rising slowly and steadily, in line with the long-term trend.
[Read: 10 Ways Your Home Can Pay You Money.]
Another reason to own a home, beyond simply having a place to go at the end of the day, is to provide "a measure of inflation protection," Courtney says. But "if you own a home already, there is no strong reason to add more real estate investments to your portfolio."
More broadly, the modest recovery is small consolation for the millions stuck in homes they bought over the past decade that are now worth less than they paid. The recovery is bestowing its gains unevenly--but more rationally--than in the past, which could warm the hearths of homeowners and real estate investors going forward.
"It's still the American Dream," says Gorczyk. "There was a lot of misery during the housing collapse, but most individuals and investors forget those negative things pretty quickly."
- Real Estate