For the past few years the national real estate market has performed exceptionally well. Those looking to take advantage of lower interest rates and increased buying power have been more than lucky. Americans bought more than one million new homes last year, up 436,000 from 1981. With the increase in ownership there has been a dramatic appreciation in home value. A 40 percent appreciation is good, some areas like Boston, suburban New York and San Diego have seen an appreciation of 75 percent or more.
In most cases it was just what the homeowner was expecting, real estate was and still is one of the most soundest investments around. They've used their increased equity for everything from buying second homes, taking vacations, and building up their nest eggs but as analysts and recent developments have questioned, what can we expect to happen now the dramatic returns are starting to slow down?
Despite the slight rise in interest rates the second home market doesn't appear to be suffering.
A lot of homeowners who've realized gains in equity from the purchase of their first are trying to capitalize on the purchase of a second. There's a limited supply and a growing demand for retirement and second homes all over the country. The median price for a second home in 2003 is around $150,000 but one in four fell under $100,000. Only 6 percent were in the $400,000 range. Nowadays more second homes are being purchased by families with an average income.
They've seen a pretty decent return on their first house and want to see the same on a second while they utilize it for recreation, additional income or both. They are usually married couples in their forties with a household income in the mid $ 80,000 range. 80 million Baby Boomers will retire in the next ten years and the market should grow but if interest rates continue to climb and incomes don't keep pace with the rising cost of housing the market may not be as active as projected, there may be more renters and depreciating values for properties.
Everyone is expecting interest rates to rise but they aren't certain of just how much. One thing is certain that even a slight rise since the beginning of the year has had an adverse affect on representative markets like Hartford Connecticut. Home sales in Hartford slowed down this quarter after three years of record breaking sales and price increases. This past June the average price of a home was $262,400, up only 1.39 percent from $258,773 in 2003. "This is a number we've been looking for, a slow down in price appreciation," says Ron F. Van Winkle a West Hartford economist. In June sales rose 8.3 percent compared to June 2003 after sales dropped 7 percent in May from a year earlier.
The decline doesn't indicate an end to prosperity but it does predict a decline in sales and that the steadily increasing price of homes in the area won t rise so quickly. There could be a worse scenario if interest rates rise more rapidly. It could deter a number of prospective buyers from purchasing but demand for housing has consistently outpaced new construction.
The number of home buyers have steadily increased and will continue to do so at a slower level unless of course the demand abruptly tapers off.
Current reality dictates that home prices won't rise nearly as fast as they've done in the past decade, the market slow down to catch it's breath. Mike Sklarz, a Honolulu based home price analyst predicts prices will only rise half as much in the next decade. According to him home prices on a national basis only rise at a pace slightly faster than inflation. It's just over the past five to ten years home buyers have been gaining greater returns because most have appreciated at higher level, ahead of inflation. Lower interest rates and easier monetary policies and growing populations have contributed to more homes being sold. Young home buyers, minorities, single women, and two income families have gained access to home buying through new mortgage programs via government agencies like Freddie Mac and Fannie May.
There is a continuously growing segment of new buyers. In most cases development has kept paced with demand in other cases it has surpassed it. Demand has not outpaced buying options but in a lot of growing urban areas average incomes haven't kept pace with housing costs. Nationally from 1996-2003 incomes rose 22 percent while home prices climbed 47 percent.
The contrast is more stark in Boston where income rose 40 percent, while home prices shot up 120 percent. San Diego statistics yielded similar results, incomes rose 31 percent while home values went up 141 percent. In a scenario like this more people will be forced to rent rather than consider buying a home. As interest rates rise, the deficit grows, and inflationary pressures influence the market it is certain the market will reflect these changes.
Analysts and realtors are just waiting to see how much things change for the worse, what aspects remain the same, and where activity or opportunity opens up where it wasn't present before.