What is happening in Housing?

If you ask 10 people what is going on in the residential housing industry you will likely get 10 opinions. Here is mine.

Since the mid-1990's when the country came out of the savings and loan crisis there seemed to be nothing but up in residential real estate prices. Many of you do not remember the savings and loan crisis of the late 1980's and early 1990's. That crisis was caused by the change in tax depreciation rules. In a tax act passed by Congress in the late 1986 depreciation allowance was changed from 15 years to 27.5 years. The result was a lowering of prices for rental real estate that at the time mostly financed by savings and loans. Construction rates at the time dropped almost by 50%, since the use of tax incentives to build real estate had been almost halved as well. IN the end the federal government had to step in and rescue many of these savings and loans through FDIC. The cost was significant, but nothing like the current crisis costs.

Sometime in the mid-1990's the US government decided to push banks to extend loans to more people for the stated social purpose of having more people be homeowners. The idea sounded good, but the results have been awful. What commenced was a overreach by the federal housing agencies to insure almost every loan extended and private financial agencies inventing the sub prime loan business and mortgage backed securities wraps. In the end society discovered not everyone needed to be homeowners. This has resulted in a massive overbuilding of housing and the near collapse of the housing industry. Housing prices dropped off a cliff and the Federal Reserve has had to reduce interest rates to 60 year lows in order to keep a complete collapse of housing.

We now reach 2011 and there seems to be no bottom to housing prices. The bad news is there is likely another 10% to 15% tp go on the downside for housing prices. We still have a oversupply and we also have a large number of what is called shadow inventory where banks are holding off foreclosure from the fear more actual supply would depress housing prices further. Add in the fact that the federal government is looking to be exiting support of the housing industry by ending the federal mortgage agencies that insure home loans.

In the end all this will be good as building of houses dictated by the private market would keep supply and demand in focus and result in more stable housing prices, which would be a positive for buyers, sellers, and local governments who depend on property taxes.

My opinion is we are very close to a bottom in housing prices. Evidence the last couple of months private cash buyers have been moving into markets buying up the most price depressed housing. These buyers see bargains and are taking advantage of the opportunity. I expect these people know they may not be buying at the bottom, but since no one can call the absolute bottom now is the time to move. They also see mortgage rates have begun to move up. Rates for 30 years loans that had reached 4.2% are now closing in on 5.0%. The next act here will be that banks will begin moving more shadow inventory on the market and that should result in another leg down in prices and maybe some movement down in rates. But understand banks now are getting on their feet and will be able to control this situation, so do not expect any serious movement in prices or rates.

The good news (if you are not a builder) is that housing starts are way below what is needed to replace inventory being sold. That will take a good number of years to work off, but it is happening. So do not expect a significant increase in housing prices right away. The other good news is that the large number of children born in the 1980's and 1990's in this country's latest baby boom will soon be in the household forming ages As these people enter the market existing inventory will be further reduced and housing starts will pick up. My best guess is that we are about 8 to 10 years from seeing this occur in earnest, but as we move forward prices will begin to move up again.

How does one take advantage of this situation? If you have cash or credit consider buying some housing carefully selecting for price, location of course, and interest rates. You will likely never find a better time in your lifetime to buy a home of your own and if you are an investor it's look pretty good too. You can also take a look at mutual funds that invest in real estate and ETF's that do the same. There are few residential real estate REITS and frankly I do not see any that I would recommend.

People who have the resources and buy real estate now could very well look back in 10 years or so and realize some significant capital gains. Opportunities like this come only once in a lifetime and now is your chance.