5 Year Home Price Projections – Positive or Negative?

This month in Fortune Magazine there was a great article speaking into the current condition of the real estate market, what happened to start the boom, what happened as the boom became less boomy, and how it is affecting people now.

In a previous post I talked about how in the beginning when money was easy to get and real estate was cheap, there was way more demand for the supply; this started the boom (or more, frenzy). As people saw their friends and neighbors selling property for more and quicker AND after bidding wars, the frenzy grew. “Buy now, buy everything, double the price and sell tomorrow!” Well, everyone I knew in the “biz” agreed that that couldn’t last forever, but had no idea when it would settle down. Just when you thought an unbeatable record was set, it was broken as well.

Fast foward to today. Taxes and insurance is up, interest rates are up from a couple of years ago and the subprime mortgage market has just recently gone through a meltdown. Real estate is not as easy to purchase as it once was, so the demand is down. Develpers couldn’t slow their building train down quick enough so new home inventories are way up. Property owners have mortgages payments they can’t afford because they bought a little too much home with low teaser rates and high hopes that the future appreciation would bring profits to make the risk worth taking.

Fortune Magazine’s Shawn Tully couldn’t have picked a better time for this story. He discusses that through calaboration with Moody’s Economy.com they were able to project the 5 year outcome of our current real estate market conditions based on history of average annual rent increases, annual property value increases and their correlation with each other.

He explains that there has always been a direct correlation between property values and the average rental rate for similar properties. This makes sense, right? Why would you purchase a home when it costs substantially less to rent? The prospect of future appreciation is not reasonable right now. Sure it is nice to own your own home. If you want to move a tree in the front yard, or if you want to update the inside, you don’t have to ask permission. But is it ‘pay twice as much a month’ worth it?

According to their findings, they estimate an average fall in prices nationwide over the next 5 years to be around 28%. Of course, not all markets will see a decrease. Areas like Dallas and Houston (1.3%), Detroit (6.9%), Indianapolis (7.3%) and Cleveland (9.6%) never really got a taste of the boom, nor experienced radical price valuation increases and thus have positive projections. However, cities such as Orlando (-34.2%), Miami (-32.2%), Sacramento (-26.1%), and Las Vegas (-26.3%) experienced such rapid value growth that the 5 year adjustment is negative.

Projections are based on a 15 year history of the property value/rent correlation. For us to get back to reality with regards to the real estate market on a national scale, the gap between property values and market rent rates needs to close.

The entire article: click here.

As you’ve heard me say in the past, real estate is very local and regional in nature. In Panama City Beach, I’ve always thought we were a little ahead of the national market with regards to market conditions. I feel that prices were shooting up here before many of the larger markets, and the correction began sooner here then it did in many of the local markets. Don’t get me wrong, I still think we are going through a correction period, but we’ve come a long way. Not to mention all the future economic development that is slated for our area over the next five years. The Airport relocation can do mounds for our area in putting us on the map and seeding growth and opportunity. It will open this market up to many who just couldn’t rationalize spending the money and going through the effort it takes to get here.

The airport will be great and our area will be awesome in 5 years. The CRA will be done, Pier Park will be very well established and we should have planes coming in from all over the country and hopefully a few big corporations’ headquarters here.

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