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» VISIT US ONLINE @ DSNEWS.COM year we're pretty much using up the remain- ing excess, and that's why home prices are now bottoming out. They're not just bottoming out. In many markets, home prices are now below the local income-equivalent price, sometimes by more than 20 percent. As the economy picks up, since homebuilders will be unable to catch up with demand fast enough, home prices in these markets will rise at 5 or 6 percent a year, just to get back to even. Home prices in many markets are now below -15 -12 -9 -6 -3 0 3 6 9 the local rent-equivalent price. When home prices rise, rents don't rise as much, and invest- ing in rental properties becomes uneconomic. When prices fall, rents don't fall as much; in fact, they almost never fall, and at some point rental properties are again an attractive option. That's the case now in many local markets; investors can again buy vacant homes and rent them out, a good thing because foreclosed homeowners must live somewhere. Where home prices are also below the income-equivalent price, investors get the added bonus of a strong rebound in the value of their investments over the next five years or so. Getting Specific Aside from the overall picture, what the future holds depends very much on individual local markets. Of the 315 markets Local Market Monitor tracks, about half had no real estate boom at all and therefore, no bust. Many of these largely unscathed markets are in the Midwest, but Denver, Dallas, and Atlanta also skirted the worst of the downturn. In general, these markets now have lower unemployment and higher job growth and will soon be back to "normal." Of the markets that did have a sharp boom demand, especially since 400,000 construction jobs disappeared. The second-home market is dead for now, so prices in many of these mar- kets will drop further still and then languish. The problem is worst in the smaller coastal markets because the retirees who will eventu- ally absorb the inventory prefer proximity to the big cities. California Many markets in California also had too much construction, especially those to the east of the Bay Area, where land was cheaper. But unlike Florida, job growth has picked up and immigration will resume. Big cuts in government jobs have dampened housing demand in many smaller markets, and of course in Sacramento, but prices in most markets will bottom out in the next year. Texas With a few exceptions (Midland, Odessa, and subsequently a debilitating bust—many in Florida, California, Arizona, and Nevada, but also Washington, D.C., Seattle, and New York—there are now two types: those set to recover and those with longer-term economic problems. Those positioned for recovery have low unemployment and strong job growth; Salt Lake City is a good example. The others have continuing problems with high unemployment and slow job growth, a prime example being Las Vegas. Florida Some markets will still hurt for a while, mainly those where homes were built for second-home buyers. This includes most mar- kets in Florida. There just isn't enough local El Paso), Texas markets didn't have a boom this time around and didn't have a bust. A quick recovery from the recession abetted by the energy industry encouraged migra- tion from other states. Home prices generally have been flat the last few years and are now well below the levels local incomes can sup- port, setting up a good future as the overall economy grows. Other states recovering well from the recession include North Carolina, Utah, and Tennessee. It's the Economy, Stupid! As far as real estate is concerned, we don't have a national economy; we have hundreds of local ones. That said, how quickly real estate recovers depends very much on economic growth. At Local Market Monitor, our cur- rent home price forecasts assume the economy will grow slowly for another year but improve rapidly thereafter, leading to annual price increases of 3 to 6 percent in most markets. A sideways economy would put our forecasts at the lower end of that range. Real estate and economic cycles are usu- ally out of sync; real estate cycles are longer because it takes longer to iron out housing supply and demand differences. This time the cycles are very closely linked because the boom in home prices had a lot to do with the recession that followed. We've reached a point now where real estate will recover even if the economy remains sluggish because the excess construction of previous years is almost absorbed. But the speed and extent of the recovery in real estate depends on local job creation, which can't thrive unless the national economy grows. Food for Thought Demographic changes in the housing market have several implications, the chief one being that future homebuyers will have lower income. The lower end of the market will be the most active. Builders must build less expensive homes, and lenders must produce more affordable mortgages without increasing default risk. Does this mean 40-year mortgages, rent-to- buy, and communal guarantors? It can't just mean higher loan-to-value ratios, government guaran- tees, and lower income qualifications or we'll find ourselves back in the subprime soup. Ingo Winzer is president of Local Market Monitor and has analyzed real estate markets for more than 25 years. In 2005, he warned that many housing markets were dangerously over- priced; two years later, his assessment manifested in the biggest housing bust of a generation. 77 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992

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