Editor’s note: This is the second of a two-part series. See Part 1.
The 2013 economic forecast from the National Association of Realtors’ annual conference was a mixed bag, but buried within it there were nuggets of good news to help you grow your business next year.
What does 2013 have in store for our industry? The news may be better than you anticipate. The following areas represent bright spots that will continue to make real estate one of the soundest investments that anyone can make.
1. Real estate ownership builds wealth
One of the most powerful reasons for anyone to purchase real estate is that real estate ownership builds wealth. In contrast, renting actually prevents wealth accumulation. To illustrate this point, the Federal Reserve data on the median net worth of renters vs. owners shows that the typical renter has about $5,000 in assets.
Compare this to the typical homeowner, who in 1998 had a net worth of approximately $175,000. In 2001 and 2004, that number held steady at slightly above $200,000. In 2007, that number shot up to close to $250,000. Even with the downturn, the median net worth of owners in 2010 was approximately $180,000. Using the 2010 numbers, the median net worth of homeowners was 36 times greater than the net worth of those who are renters.
There are numerous reasons for this difference. First, rents generally keep pace with inflation. When landlords experience increased costs in terms of taxes or operating expenses, they generally pass those costs along to the renters. Second, due to the demographics as well as the foreclosure crisis, we have a continuing increase in the number of households being created without a corresponding increase in the number of housing units. This means that increased demand for rentals will produce increasingly higher prices.
Most importantly, renters pay down their landlord’s mortgages. Provided an owner takes a fully amortized loan (as opposed to an interest-only loan), homeowners create wealth each month as they reduce their principal.
2. New-home market has the wind at its back
Wells Fargo’s senior economist Mark Vintner reported that demand for new housing has increased to the point where there is only about 4.5 months of inventory available nationally. Demand is strengthening, albeit spotty. Builders are back in about 15 prime areas while the rest of the country is still lagging behind.
3. Time to get out of the distressed property market?
If you’re tired of dealing with short sales and foreclosures, 2013 may be the time to get back into the more traditional new-home and resale market. Here’s why: Vintner reports that the best foreclosure properties are pretty much gone. The best buys now are in "the suburbs and the fringes." This means some of the hard-hit owners in these areas may actually start to see some relief in 2013. As Vintner put it, "2013 looks better than 2012."
NAR Chief Economist Lawrence Yun’s remarks coincided with Vintner’s remarks: "Existing inventory is at an eight-year low and new-home inventory is at a 50 year low … The shadow inventory is falling, as well as the number of homeowners who are seriously delinquent."
According to Yun, distressed property sales in 2011 accounted for 33 percent of the total sales. This year, that number has fallen to 25 percent. For 2013, Yun predicts that the number will fall to 15 percent, then to 8 percent in 2014, and finally to 5 percent in 2015.
4. Some good news from NAR
Yun reported the following trends, which seem to bode well for the real estate market in 2013. First, there will probably be an increase in the median sales price of somewhere between 5 and 7 percent. Many areas are reporting increases in the 15 percent range, while foreclosure-ravaged Arizona has ticked up a whopping 30 percent. In fact, "Arizona, California and Michigan have used up their distressed property inventory," according to Yun.
Even though there are tighter credit standards, the pipeline of future deals looks as if it is filling up. Some of the ways to predict this include monitoring how many times lockboxes are opened for showings. Those numbers are also up, as are pending contracts. Yun projects that 2012 should have a total of approximately 4.65 million sales. In 2013, he projects that there will be up to 5 million sales, an "average" year for the real estate industry.
Third, rebuilding from Hurricane Sandy will also help to drive up the number of new housing starts.
Fourth, Brazilians, Chinese and Germans are all extremely active in the U.S. real estate market. Although much of the interest is concentrated on the East and West coasts (especially in Florida), this additional influx of buyers will continue to drive what may be the housing shortage of 2014.
As Yun summed up, we have definitely passed the bottom. In fact, we will need 1.5 million houses to accommodate the population increase. "The momentum is there for an improved market in 2013," he said.
