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Housing Prices Are Ready to Go Up

Adam Rust's picture

Posted August 17, 2011

Now is a good time to buy a home. Note: I am not a RealtorĀ© nor am I a part of any other entity with a professional bias toward the value of investment in housing. I am just a guy trying to make two sides of an argument. I put forth the logic for the other perspective - that housing prices will fall even more - last week.

Let me offer a few reasons why the housing market may surprise us:

  • Interest rates make homes far more affordable. More people can buy homes. People can bid higher on a home, too.
  • The supply of new homes coming on to the market has been low for some time. New housing starts are still not picking up. Housing starts have been suppressed for at least four years. Last year, there were 471,000 housing starts. Homes are still getting older. One estimate says that our nation demolishes approximately 200,000 homes every

    year. That means the number of homes is going to shrink. If the demand for homes is constant, then prices will have to go up.

  • The market seeks out undervalued investments. Prices can only go so low before capital will rush in to take the returns presented by the opportunity. Smart people buy when things look bad. Warren Buffet bought Goldman Sachs right after everything soured in 2008. This will be the same story all over again. Even now, big money is moving into rental housing. Private equity funds see the solid 10 percent rate of return on single-family rental housing that they are willing to do the hard work to find local property managers. Canadian pension funds are buying multi-family housing in the US.
  • Apartment rents are going up. The average apartment rented for $931 at the end of the year. REIS says that it will break $1,000 before the end of the year. Couple that with low interest rates and more people are going to find that it pays to own a home.
  • Servicers are making money. Ocwen reported that income jumped 103 percent in the 2nd quarter, when compared to the same period last year. Servicers make money when people are making their payments. When borrowers are delinquent, the servicers make payments in lieu of foreclosure for the investors that they represent.
  • Home prices were higher during the previous spring were higher than in the previous two years. That is very impressive, because two years ago there was a significant boost to sales that was driven by the impending expiration of the first-time homebuyer tax credit. The composite Case Shiller Index reported a 1.1 percent increase. The gains were widespread. In 15 to 20 cities, prices increased in May.