As reported by the Associated Press, “sales of new homes fell to a six-month low in August. The fourth straight monthly decline during the peak buying season suggest the housing market is year away from recovery.” In our update last week, we reported sale of new and resale houses in August was up 8.8% from July. This shows that the aggregate increase in the number of transactions was mostly due to existing home sales. The weak new home sales volume is a clear sign of the glut in the real estate market. California home prices have been in a downward spiral for over 3 years but there is still so much supply in the market that there is no sign of a turnaround in the near future. This problem is exacerbated by the weak demand.
Contributing factors to the dismal real estate demand are high unemployment, very tough lending standards, and strict down-payment requirements. These factors are preventing potential buyers from purchasing real estate and have made it near impossible for working class families in the metropolitan areas to purchase a home.
Combine the high supply with low demand and all of a sudden low and falling prices make a hell of a lot more sense. The big question, however, is how long is this trend going to continue? It is very easy to adopt a doom and gloom view and to forget that economies have cycles and that big winners almost always emerge out of bad economic times.
The United States is still the biggest economy in the world with a sophisticated industrial and technological base. According to data supplied by the Migration Policy Institute, the US economy has benefited from an average annual inflow of more than one million immigrants between 2000-2010, most of whom settle in major metropolitan areas and create demand for real estate and other goods and services. With adjustments to the size the dynamics of the labor force unemployment will eventually stabilize and then start to decline. Since 2008 families have made and will continue to make adjustments to their spending habits creating healthier balance sheets. In our view, all this will, in the long term, change the direction of the economy.
CASH IS KING
What remains constant through economic cycles is the people need a place to live in. In “down” times, investors with cash can acquire assets at fire sale prices. The weak market for home sales often contribute to relatively strong rental markets guaranteeing healthy returns from the acquired assets. When the storm settles and when demand is reinvigorated, those who had the guts to invest in a down market usually reap above average returns. That’s why we believe that now is the time to use all resources to increase real estate holdings in your portfolio.
It is true that during the boom years developments in some areas were entirely based on speculation and that such dwellings may never experience considerable growth. Major metropolitan areas, however, follow a completely difference logic. They are supported by large populations and various industrial and technological establishments. Natural population growth and immigration will continue to contribute to a healthy increase in the size of the market and eventually demand in housing will exceed supply prompting relevant price adjustments.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment