Is It the Right Time to Buy a Home? A Look at the Real Estate Market
After watching the housing bubble burst in 2007, leaving many homeowners underwater or in foreclosure, some people vowed they would never again own a home.
But here we are, six years later, and things have changed.
According to the Census Bureau, June sales of new homes reached the highest point in more than five years—and a 38% improvement from last year. After taking a serious nosedive between 2006 and 2009, prices nationally are back to the same levels they were in mid-2003, well before the housing bubble burst.
That sounds promising, but is the market really improving? And more importantly—does that mean you should seize the opportunity and buy?
3 Ways to Assess the Housing Market
Scanning the headlines, you’ll probably see three important indicators of market health crop up again and again: home prices, inventory and interest rates. Of course, analyzing and predicting the future of the housing market is a little more complicated than counting three numbers—in fact, it’s many people’s full-time jobs—but these three can give you a basic idea of what’s going on.
Increasing home prices are largely considered a good sign—for one thing, it means more people have the resources to start buying again. The Case-Shiller Home Price report, the leading measure of U.S. home prices, showed prices soaring in the first quarter of this year. More specifically, according to data from the National Association of Realtors (NAR), home prices rose in 41 states and the District of Columbia in the first quarter of 2013, with the biggest gains in western states like California, Nevada and Arizona.
Prices and the second factor, inventory, are closely related. During the recession, construction slowed and many potential sellers kept their houses off the market, so inventory fell, hitting a 12-year low in January. Now that people are buying again, demand for homes means the available inventory is quickly being snapped up. In fact, data from Realtor.com for the month of June—the most recent data available—shows that while inventory is on the rise in cities such as Chicago, Washington D.C. and major Californian markets, inventory on a national scale (while up 6% since the year’s start) is more limited than in recent years.
Much like your Econ 101 teacher told you: The housing market operates based on supply and demand. Right now, demand is gaining on a slow-growing supply, meaning people are paying more to secure their share … and driving up prices. If prices continue to rise, it should encourage sellers to put their homes on the market and developers to resume building, both of which will expand the available supply—in fact, construction has already picked up 60% in the last two years.
Then there are interest rates—the amount of interest a homebuyer or homeowner pays on his mortgage. In the past year, rates reached notable lows, hitting 2.56% for a 15-year fixed mortgage and 3.35% for a 30-year-fixed. The declining interest rates were part of an economic stimulus strategy from the Federal Reserve Board, which hoped to spur the market back into action. (As of publication, the rates for those two popular fixed-rate plans are back up to 3.43% and 4.37%, respectively.) It’s predicted that as the Fed winds down its efforts while the economy improves, rates could clear 5% by the end of the year.
The rising interest rates have the potential to slow growth of the housing market, but despite being a top concern for would-be buyers—over half of 2,000 people surveyed in June by real estate site Trulia would be waylaid from their buying plans if rates exceeded 6%—it doesn’t appear that their fears or the upward trend have significantly slowed buying so far.
Between the rising home prices, expanding inventory and low interest rates, the housing market should be improving. But of course, after the financial trauma of the last few years, experts are wary to forecast too rosy a picture of the next few years in housing.
For instance, have a look at another number: The NAR has created a monthly measurement system called the Housing Affordability Index, which takes into account median price of a single-family home, median family income and interest rates to gauge whether it’s a good time to buy. Numbers over 100 indicate that the average American family should be able to afford a purchase, and in May 2013—the most recent data available—the Index showed 172.7, about the same measurement as affordability in 2010 (not considered a particularly impressive year) and a drop from last May’s 188.4. While favorable, the current market isn’t exactly considered ideal.