For the last five years (or is it 6?), millions of people have been playing real estate experts, trying to make sense out of the unusually agonizing decline in both unit sales and prices we have experienced all over the country. Was the real estate crash the cause of the financial crisis, or was it the result…or a little bit of both? I am sure all of you have an idea and a host of explanations about this. So have I. Whether buyers, or sellers, or observers, or active players in real estate or finance, we had plenty of time to reflect on what happened and learn the lesson. What did we learn?
I am not going to go back in history and point fingers at banks, mortgage brokers, administration, Congress, real estate practitioners or even those buyers & sellers who benefited from easy money before losing it all. Let’s focus instead on the psychological aspect of the real estate dream. We kind of know now what can cause a crash, all the mistakes that can be made in the name of greed or ignorance, but do we know what causes a boom?
The key words are hope and optimism. Those two words define us as Americans. That’s who we are. No matter what, we need and want to believe in good news and those who peddle them. Over the years, this national trait served us well. It gives us faith & power. There is no mountain we cannot climb, no problem we cannot solve. Everything is going to be OK. Positive thinking is made in the U.S.A. Quite a difference from the place where I grew up in Europe. Over there, you learn quickly how to be cynical and skeptical as part of your natural defense system.
Again and again, we were proven right in this country as it relates to real estate. Granted, every 4 to 6 years in the recent past this industry took a little plunge but, each time, after a couple of years of suffering mostly due to the lack of financing or its prohibitive cost, we got back on our feet stronger than ever. Over time, real estate has been and is a tremendous investment. It’s a fact. However, we should never undervalue timing, knowledge, wisdom and professional guidance.
Look at the last 25 years. The National Bureau of Economic Research did just that in a study that points to buyers’ expectations and how they led to the housing boom and crash. A bunch of specialists analyzed survey findings over that time period in several key regional markets: Boston, Alameda, Orange and Milwaukee. The study, as reported by Destiny Bennett from Economy News, shows that home buyers were overly optimistic about long term price appreciation.
For example, asked about their 10 year expectations, buyers (survey respondents) projected to get more than a 10 percent return per year in comparison to mortgage rates. Not a bad return indeed. Frankly, a lot of buyers experienced such appreciation. I know quite a few who got a lot more in the late 70’s or the late 90’s. That expectation, of course, is what contributed to the boom.
In the years prior to 2004, says Bennett, the housing market was experiencing an upswing. The market was flooded with buyers, looking to take advantage of home ownership and potential appreciation. Market volatility was largely overlooked in buyers long term projections since history demonstrated that, overtime, the market performs well. The study shows that today, buyers have a much bleaker outlook regarding profitability.
As Bennett points out, a July survey from Pulsenomics shows that for the next 5 years, from 2012 to 2016, buyers only expect a 1.95% annual appreciation. They are more prudent on their forecasting, for the moment at least. I think this expectation is reasonable in much of the country, even if some areas enjoy a much more dynamic market and a better than 10% price hike so far this year.
No matter what it ends up being, I am confident that going forward, there will be no better place than a home to put not only your family but also your money.