The Real Estate Crash: Worse Than We Thought?

The Real Estate Crash: Worse Than We Thought?

Remember the story of Red Riding Hood? The drama climaxes at the moment Red realizes the bearded, razor-toothed beast she thought was Granny actually wasn’t.

We were all “Red Riding Hooded” this week by an announcement that the real estate market—bad as it’s been since late 2006—wasn’t what we thought. Things are actually worse. Maybe way worse.

But, as our caped, optimistic little friend found out, things might still work out OK.

What Happened

According to an announcement this week, the dismal number of home sales reported during the recession was actually too high. On Tuesday, the National Association of Realtors (NAR) announced that it has been overstating the number of home sales for as long as the past five years--and this trade group is responsible for the most widely-watched data about the housing market.

According to Time Magazine: "As of last month, NAR said that nearly 4.2 million existing homes ... had been sold in the U.S so far this year. By CoreLogic’s estimate, though, only 2.4 million homes had changed hands in 2011." This discrepancy was masked by faulty bean counting, in which the NAR used outdated benchmarks to estimate home sales.

This matters because one way to check the health of the real estate market is to track how many homes are sold every month. Could the scary numbers we've been seeing since 2006, when every housing indicator from home sales to housing prices plummeted, actually be even worse than we thought? According to NAR data, sales of existing homes fell 4.1% in July of 2006 alone, but now even that data itself is in question.

Bad News Freak-Out

While the extent of how “off” the numbers have been isn’t clear yet—that will be reported on December 21st—it is clear that the real estate crash was worse than was reported.

Cue the requisite hand-wringing.

With this additional bad news, people feel that the rug has been pulled out from them (again) just as things appeared to turn around.

What It All Means

While this new revelation is disappointing, in a sense, it doesn’t matter today. It’s like the disclaimer on commercials about investments: Past results aren’t indicative of future performance. In other words, the fact that the real estate market was worse than we thought doesn’t say much about what will happen in the future. In fact, it just makes housing cheaper for those looking to buy a home.

So, before anyone dives into a proverbial bunker, let’s put this new information into perspective.

Is housing improving, or isn’t it?  

Real Estate Past, Present and Future

There are some signs that the housing market is actually making a recovery. Borrowing to buy a home has rarely been cheaper, with many record low mortgage rates; many are still under 4%. (By contrast, at the end of 2002, a typical 30-year mortgage rate hovered around 6%.) In addition to rates, actual prices are low: Houses haven’t been this affordable for most Americans since before 1980.

Fortunately, affordable housing, financing and low down payments seem to be spurring demand for homes. In October, home sales were up over 10%, led by the Northeast, which saw an increase of almost 20%. All good signs.

How This Impacts More Than Just the Real Estate Market

The performance of the housing market has a resounding impact that extends to the broader economy. This is because real estate is a proxy for understanding how well the general economy is doing, and because it influences employment.

When lots of houses are being built, the construction projects provide jobs for lots of people. But, when there's bad unemployment, fewer people want to buy homes, which further reduces the available job opportunities. The proof is in the numerical pudding: During the bubble expansion years, housing accounted for about 30% of employment growth. But now, post-crash, U.S. joblessness is at a 2.5-year low.

So, Where Do We Go From Here?

The full report comes out on December 21, so don’t be surprised when the media begins crying that the sky is falling. If you own a home, be patient. The market appears to be recovering. If you’re considering buying a home, it’s unlikely that you’ll get a much better opportunity to buy, and finance, so cheaply. Same goes if you're thinking about refinancing your mortgage--now's a great time.

The revised home sales numbers will surely demonstrate that one of the worst real estate markets was actually worse than we reckoned. But that’s history. The current data on the housing market shows a better, more optimistic picture.

So, while the upcoming news may have everyone crying wolf, remember, Little Red Riding Hood got to her home safe and sound in the end.

Dive Deeper Into The Market

The real estate market is slowly recovering, but not as many people are buying houses as you might expect. Why? Here are seven factors that affect the housing market.

Find out how interest rates affect the housing market here.

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