The Long Term Effect Of The Foreclosure Crisis On The Future Of Real Estate Research Papers Examples
In recent years the real estate market has been tumultuous at best. The burst of the housing bubble in the mid-2000s wreaked havoc. Not only did it drag down the value of real estate, but it took the nation’s economy into the deepest recession we have seen since the great depression. As we look to the 2015 market and beyond, one can count on sales improving, and a mild rise in the number of Real Estate jobs available, but the market has a long way to go before it can be given a clean bill of health. Those real estate agents who want to be competitive in the future market need to understand how the real estate bubble of the 2000’s and the foreclosure crisis that followed have affected the real estate market, and altered its path into the future.
First, those in real estate need to be hyperaware of the Seasonal Effect. The Seasonal Effect is a historical tendency, which is now an accepted market pattern in real estate prices. Generally, real estate agencies see a rise in sales activity and home prices in spring and summer, and a decline in the fall and winter. According to a report by the New York Times, this effect has become “more pronounced” since the economic crisis (Shillman, 2013). Truila’s Chief Economist, Jed Kulko suggests that this exaggerated effect is the direct result of an increased number of distressed or foreclosed home sales disrupting the traditional sale market (McBride, 2014). He notes that some real estate agents have elected to ignore seasonality during the financial crisis, because the data is flawed or irrelevant. Unfortunately, this misses a major opportunity. Rather, Kulko recommends that to be competitive in the changing market, agents should develop a more complete set of seasonal adjustment factors that account for the presence of distressed home in the market place (McBride, 2014). The effects of the foreclosure crisis will likely affect the model for years to come, and with modern data tracking software creating a more accurate model is not out of reach, and could allow the savvier real estate agent to take advantage of the new patterns that are emerging.
Seasonality is not the only long term effect the foreclosure crisis is likely to have on the real estate market. In the post collapse buying scene, people seem genuinely wary of the market, and that combined with the historically slow rise in property value suggests that there will not be another major housing bubble for some time. The housing bubble that collapsed in the mid-2000s was created when housing prices increased by nearly 86% between 1997 and 2006 (Shilling, 2013). It is unlikely that prices will stray that far from the mean again during any current real estate agent’s career. The only other significant bubble in the last century was in the 1940s, and it was roughly 30% less dynamic than the most recent bubble (Shilling, 2013). This insinuates that a wise realtor will plan for a stable market rather than a rapidly increasing set of home prices.
The slow-to-rally real estate market has been impacted, in part, by a decrease in home ownership since the foreclosure crisis began. The Census Bureau has marked as much as a 12% increase year over year in those renting homes, instead of buying (Shilling, 2013), and the construction of apartment buildings is the only sector of new home construction that has been on the rise during the downturn economy, increasing by as much as 150% since 2010. (Searcey, 2014). There are several reasons why people appear to be electing to rent rather than purchase in the changed economic climate. The three most pressing factors seem to be a skepticism about home ownership during a period of history fraught with home loss and foreclosure, an inability to get financed under tougher mortgage application terms, and the fear of job instability and the need to relocate. Those real estate agents who capitalize on this trend, and understand how it has affected real estate economics will thrive in the years to come.
First, real estate agents should get-in while the getting is good. There is a major opportunity to become a broker for rentals as well as facilitating the sale of traditional one-family homes. Specifically, those in the young adult category from 18 to 25 are increasingly waiting to buy homes, opting instead for the flexibility afforded them by a year to year lease. Since new apartment construction is still dramatically rising, this market is not likely to dry up anytime soon, and with the demand increasing faster than those homes can be built, the prices are rising significantly faster than single-family home sales prices. More specifically, Zillow’s Chief Economist, Stan Humphries was quoted as saying:
Over the past 14 years, rents have grown at twice the pace of income due to weak income growth, burgeoning rental demand, and insufficient growth in the supply of rental housing. Next year, we expect rents to rise even faster than home values, meaning that another increase in total rent paid similar to that seen this year isn't out of the question. In fact, it's probable (Olick, 2015).
Some analysts suggest that this trend in the rental market could actually stimulate home purchases as well. They expect an increased number of families to buy homes rather than renting because the spike in rent prices have placed the available properties out of the average middle class family’s price range. This, in combination with the low down payment, low interest rate introductory mortgages being offered to first time home buyers, or buyers who are rebuilding credit after a foreclosure, may entice more middle class families to consider reinvesting in property (Olick, 2015). Real estate agents who are aware of the savings available to those who purchase, and who are prepared to help new homeowners get financing with agreeable terms, are more likely to increase sales of single family homes in the coming years.
Anthony Hitt once said “To be successful in real estate, you must always and consistently put your clients' best interests first.” In recent years, it has been hard to balance what consumer’s needed with the volatile nature of the market, but as the market begins to stabilize, serving the client’s best interest means understanding, and guiding them through, all their options. As agents begin to work in the 2015 market and project the future of real estate activity in their area, they cannot count on a rapid increase in market price, but should be able to depend on prices that are stabilizing near the historic mean. To become competitive, they will have to be willing to work in both the rental and private sale sectors, balancing the rising demand for urban apartments with the age-old desire to settle down and “invest in something solid.” This will serve as the crux of the market for several years to come.
McBride, B. (2014, August 11). Calculated Risk: Kolko: "Let’s Improve, Not Ignore, Seasonal Adjustment of Housing Data". Retrieved from http://www.calculatedriskblog.com/2014/08/kolko-lets-improve-not-ignore-seasonal.html
Olick, D. (2015, January 1). As Rent Soars, 2015 May Be The Year To Buy A Home.NBC News. Retrieved from http://www.nbcnews.com/business/real-estate/rents-soar-2015-may-be-year-buy-home-n276926
Searcey, D. (2014, October 22). http://www.nytimes.com/2014/10/23/business/no-picket-fence-younger-adults-opting-to-rent.html. New York Times. Retrieved from http://www.nytimes.com/2014/10/23/business/no-picket-fence-younger-adults-opting-to-rent.html
Shiller, R. (2013, January 26). Housing Market’s Future Still Has Many Clouds. New York Times. Retrieved from http://www.nytimes.com/2013/01/27/business/housing-markets-future-still-has-many-clouds.html