The next 6 months to a year will be very interesting in the housing and real estate markets. The bubblefication of the housing market has been accentuated by the low interest rates and returns from the stock market and mutual funds.
Home prices are up 7.4 percent from June 2001 to June 2002, according to the National Association of Realtors.
Home sales have declined by 12 percent from May to June, and July sales are 4 percent below a year before.
Snap, Crackle, Pop!
Just like the stock market, bubbles usually occur in the last two years of the boom. Over the last five years, residential housing has increased 34 percent. Yes, mortgage rates are at a 30 year low; however, should unemployment reach 7.5 percent with low cash and liquidity reserves in the household: "Houston, we have a problem."
Income and earnings pay loans back. Personal income is $7.5 trillion nationally. Individual owned residential real estate is $12 trillion. The ratio is 1.62 to 1. This is about 25 percent higher than historical averages. This ratio is very analogous to the price/earnings ratio for stock, which became inflated to 45 to 1 when the historical average was 16 to 1.
The point here is if you’re considering purchasing a home, look for value and be careful unless it is a 10- to 20-year timeline investment.
Second, if we go into a double dip recession, the bubble will burst and values will decline by about 30 to 40 percent in some regions.
Third, cash and liquidity in the household will become king for maintaining economics and capitalizing on good deals.
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Editors' note: Dave Kohl, Soybean Digest Trends Editor, is an ag economist at Virginia Tech. He recently completed a sabbatical working with the Royal Bank of Canada. He is now back at Virginia Tech with his academic appointment, which is teaching, extension, and applied research.
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