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Homeowners and real estate investors have gotten used to the mantra of "Real Estate Always Goes Up". Chastened by the recent market implosion, their new cry is "Over The Long Term, Real Estate Always Appreciates". Let me suggest a slight modification to their slogan - "Real Estate Values Will Keep Up With Inflation Over A Very, Very Long Time". It's not catchy but the the fundamental drivers of Real Estate appreciation in the U.S. just aren't there. While it's possible that prices won't decline much further, don't expect them to start soaring any time this next decade.
The following 5 Factors, will put downward pressure on any price increases for many years to come:
1) Interest Rates Are Not Going Lower: The real estate play on interest rates is over. Current interest rates for a 30 year loan are hovering around 4.5% to 5.25%. Years ago, in the late 90s, you were lucky to lock in an interest rate under 8.0%. In the early 80s, interest rates on fixed rate mortgages soared to 17% or 18%. Back in the early 80s, a good size house in a major metropolitan area fetched around $125K. By the late nineties, that same house went for about $275K and these days it would command a price of $500K.
The real estate industry will point to these figures as irrefutable evidence that real estate always goes up. What they don't tell you is that, because of stratospheric interest rates back in the 80s, the $125K house came with a heavy price tag - monthly payments of $1,883. By the late 90s, interest rates had simmered down a bit and the payment on a $300K mortgage was $2,115. Today, with interst rates as low as 4.5%, financing a 500 thousand dollar house requires a monthly payment $2,533. When you consider how much wages have gone up in the last 25 odd years, the moderate increase in monthly payments is actually pretty reasonable if you factor in wage inflation.
The problem is that rates are not going to zero and there is very little chance that they'll go much lower than 4.5%. It boggles that anybody would accept a 4.5% return for 30 years. Would you lend $50,000 to your own brother for that kind of return? If the answer is yes, please consider adopting me as a member of your family.
Perhaps the number one question that's rattling international bankers from Peking to Paris is how much longer foriegn investors will continue to buy our treasuries at current rates. If you factor in the decline of the dollar - many of these investors have taken a major hit in terms of their local currencies. Going back to our real estate theme - the bottom line is we're not going to see housing price increases fueled by lower interest rates for a long time to come. The far more likely scenario is that we will see increases in interest rates putting downward pressure on prices.
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