Q: Bob, love your information in the columns. What do you think is ahead?
- Ron B.
A: Ron, in early 2006 I predicted the market was in for a big downturn. Many people thought real estate prices would soon rebound from a mild slump. I am not that optimistic of that nature. In my opinion, prices were only at the beginning of an extended decline. I watched this in California in the '80s.
There are more declines ahead. The U.S. is in the early stages of this correction. Nationwide, real estate prices have declined a few percent. In Florida (especially in Lee County), it has been devastating, even though it's been much worse in some parts of the U.S.
Easy financing has disappeared, a key element pushing prices down now. Banks are demanding borrowers have much better credit and larger down payments than before. This trend will accelerate as prices fall further.
During the next two to four years, real estate prices could fall to as low as their 2001 levels. That means that declines in some regions of 30 percent or even 40 percent and potentially more. Goldman Sachs recently said that home prices in California are overvalued by 45 percent to 60 percent, for example.
Subprime mortgages, which allowed borrowers with weak credit to buy houses, were merely the first shoe to drop. Once home prices in a region fall by more than 30 percent, even borrowers with solid credit and mainstream mortgages will face serious problems. A homeowner whose equity has disappeared because of falling prices might have to cough up $50,000 or more just to escape his/her mortgage if he is forced to sell his home because of a relocation or divorce. And refinancing has become more difficult.
When housing slumps drag on, potential home buyers tend to stay on the sidelines and wait for a rebound. Few people are anxious to make the biggest investment of their lives while prices are still falling. Potential buyers will abandon the housing market in even greater numbers as prices begin to fall more rapidly - and prices will drop even more sharply as those additional buyers leave the market. Consumer spending, which slowed significantly in late 2010, will continue through early 2011 as falling home values undercut consumer confidence and make it more difficult to tap home equity for spending money. Forecasters expect a 10 percent to 30 percent decline in consumer spending during the summer season this year. Declining consumer confidence and spending will undercut the retail sector ... the hospitality and leisure sector ... and automakers. As 2011 progresses, the economic difficulties will broaden and many Americans will lose their jobs, leading to more foreclosures.
Even traditionally secure government jobs might not be safe during this economic downturn. Plummeting home values mean billions in lost property-tax revenue for local governments, causing budget shortfalls and layoffs.
When the worst of the problems start to recede years from now, home prices will go back to increasing by 2 percent to 3 percent per year, as they used to before the recent bubble. If you are waiting to buy a home, do not try to identify the exact moment when the real estate rebound begins. Real estate prices rebound slowly, not all at once as the stock market has been known to do. Remember, during the real estate correction, it is better to wait a little too long to buy a home than it is to buy too early.
Thanks to several real estate economists from here to California for their input.
Sorry for the doom and gloom. I hope we are all wrong! There were many letters and emails asking for this to be addressed. I am in real estate and I don't like it.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL