The real state of real estate: What goes down must come up

September 15, 2010

Written Scott Swick, First Weber Group, on the NE Wisconsin real estate market

While we were in the real estate bubble years from 2001 to 2006, there were plenty of warnings that home prices and sales were climbing way too fast and that eventually the bubble would pop, and home prices would fall precipitously…which they certainly did.

In the ensuing years from 2007 through 2009, prices fell, and homeowners found themselves "underwater," an analogy referring to the fact that they owed more than their homes were worth.

But today, we face an equally interesting phenomenon. What goes down must come up. The economists are now predicting that home prices have stabilized and are improving…or going up.

Upon analyzing other factors, such as interest rates and home sales, other indicators are pointing up as well. So what is the evidence for that?

Home prices

Here in Northeast Wisconsin (Fond du Lac to Door County), the median home price has risen 1.6 percent in the second quarter this year, as compared to 2009. This matches what has been happening across the country. According to the National Association of Realtors, the median price of a single family home crept up 1.5 percent in the same period.

Now this is pretty important to those of you who are looking to buy a new home. There is an old adage in real estate that says that you make money when you buy, not when you sell. What that means is that you have to buy right to even have a chance to reap a good return.

Since home prices are rising, it is only a matter of time before we shift out of the buyers’ market back into a sellers’ market, and you missed the best time.

Mortgage rates

You probably have noticed the mortgage rates for homes have dropped again. You can now get a 4.4 percent loan on a 30-year fixed mortgage…the lowest since 1971. My wife and I just re-financed a 15 year fixed at 3.875 percent.

Well, what goes down must come up. While it is true that the Fed continues to keep interest rates at all-time lows, that is not the only pressure on rates.

Mortgages are packaged into securities that investors purchase. They are not excited about such low returns, so if you are hoping rates will go even lower, you will be mistaken. Mortgage rates going back up is as certain as the sun coming up tomorrow.

Here’s why that is important. Let’s say that you can afford $750/month for a mortgage payment. If you qualify for a 4.5 percent mortgage, and you can afford to make a $10,000 down payment, you can purchase a home up to $158,000.

But if the rate goes up to 5.5 percent, with the same down payment, you can now afford only a $142,000 home. At 6 percent, you can only buy a $135,000 property.

Now if home prices were dropping, you can play the waiting game. But since we see that they have stabilized and are rising again, what do you do?

Are you willing to bet the rates don’t go back up?

Home sales

Home sales for Northeast Wisconsin have gone up 23 percent for the second quarter, compared to the second quarter of 2009. In Fond du Lac County, sales went up even higher: a 33 percent year over year increase.

Home sales dropped from 2007 through 2009. Sales are going back up in 2010. What goes down, must come up.

So what? Well, when sales improve they eventually outpace the number of new homes listed. The number of available homes drop in the area. This means you have less to choose from.

What a great opportunity. You can buy now before prices get out of hand, rates reduce what you can buy, and you can be as picky as you want. Time to go with the flow…cuz it’s going up.

Scott W. Swick is a partner in First Weber Group and Winfield Homes in Fond du Lac.

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