Real estate investors are likely suffering from whiplash after the rollercoaster ride of home values over the last decade. The start of that ten year stretch saw an unprecedented spike in real estate prices, which culminated in the bursting of the real estate bubble in 2006, not to mention the financial crisis. Prices fell precipitously, with the Case-Shiller Housing Index losing 33% from its 2006 peak (chart) to the 2012 trough. Since then, investors have come back to real estate. Since the beginning of the housing recovery two years ago, the Case-Shiller index has regularly shown the national real estate market getting more than 10% pricier on a year over year basis.
New data shows that the rapidly rising home prices we saw in 2013 are slowing to a more manageable rate moving forward. Historically, home prices tend to appreciate only slightly faster than inflation, which has averaged about 3%/yr over the last 50 years, and there’s reason to believe that the market will settle into this pattern once again. This year, industry data, has shown multi-month declines in national home prices on a month-over-month basis. While the index still showed that prices rose by double digits compared to year-over-year, the fact that home prices have stopped appreciating on a month-to-month basis signals that valuations have started leveling off. Further, data released from real estate valuation firm Clear Capital, which tends to be more up to date than the Case-Shiller figures, shows that non-seasonally adjusted real estate prices remained flat nationally during the winter of 2014 and that prices even fell in some regions of the country like the Midwest.
The Clear Capital data also indicates that one of the main stories of the real estate recovery, cash-rich investors buying up single-family homes for rock-bottom prices, could be coming to an end. It makes intuitive sense that the easy money has been made on the residential side and investors should rotate to other segments of the real estate market. That said, the retreat of the investor class from the single-family market should create more of an opportunity for first-time homebuyers relying on mortgage financing to take a larger role in the real estate market going forward. This is another factor that would help lend longer-term stability to the residential space.
Finally, there are indications that the market is responding to the price increases of the past couple of years by getting more inventory up for sale. This comes from builders ramping up production (new construction has increased nearly 80% over the past five years), and from homeowners and banks realizing that the property they own isn’t likely to continue to increase in value at the rapid pace it has the past two years. Trulia Chief Economist Jed Kolko has tracked seasonally adjusted housing inventory and measured an 8.4% increase in inventory on that basis in 2013, and non-seasonally adjusted data shows that inventory has continued to increase in 2014, despite the cold winter weather.
On whole, it appears as if supply and demand are meeting each other in the middle after years of strange dynamics dominating the real estate market. Buying or selling a home is not anybody’s idea of a fun time, but as the 2015 real estate season begins to rev up, there might be fewer headaches associated with the market than there have been in many years. There’s no question that a strong real estate market is good for the economy. However, as we learned a few years back, it’s only good if it grows in moderation