Two years ago, we bought a beach house. We weren’t thinking about it as an investment. It was just something we had long dreamed about. The price was right. The timing was right. Now, houses in the area are selling for three times what we paid. With the rapid escalation in prices, for sale signs are popping up everywhere, and asking prices appear out of this world. We wonder how long this can last.
Real estate has been hot. Record low interest rates, combined with rising incomes and an improving stock market, have fueled this boom. In the last five years, the average increase has been a phenomenal 50%. But the increase has not been evenly distributed. In coastal areas, increases register in the triple-digit range. California and the eastern United States have also been the beneficiaries of the boom.
In the coastal area where we own property, speculation is rampant. As developers pre-sell lots by taking reservations, buyers are selling their reservations for a profit without ever taking possession of the property. Quick profits are enticing people to jump into the game. Owners are trying to time their cash-outs to reap the biggest reward. Sellers pick an asking price from the air and hope for the best. And everyone wonders how high prices will go and how long this will last. It’s nuts!
These forces are combining to push inventories higher. Over the last five years, real estate prices in San Diego County have doubled. Now, inventories are ballooning, with current listings at twice the number of last year. In Massachusetts, inventories are up over 30%. And the same thing is happening in the Jackson area.
Holding your breath?
Recently, I spoke to a Madison County real estate agent. He said that, on average, about 250 homes in the $200,000 to $450,000 range would be sold in the county in one year’s time. Current listings in this range were now well over 350, and that doesn’t count Reunion, which plans to build 1,100 upscale houses over the next 10 years.
The concern is that oversupply will dampen prices, but it hasn’t happened yet. Agents are still selling, and builders are still building. And we all hold our collective breath, waiting for the bubble to burst.
But the market still has life in it.
Interest rates are rising, but they are still at relatively low levels. The average 30-year mortgage is just under 6%, still a bargain. The Federal Reserve will continue to raise rates, but they will do it slowly and methodically, hoping to stop about 1% from now. Low rates mean buyers can afford more house than usual.
We Americans love our houses. We want bigger and better. Average home sizes are increasing. Forget about the one bathroom per household of my childhood. Now, we have more bathrooms than people. We have three car garages, master suites and kitchens fit for a chef. At my house, we have rooms we never go in. It’s ridiculous.
Baby Boomers are becoming empty nesters but still demanding four-bedroom houses to accommodate the grandchildren when they visit. This is a group with more disposable income, fewer expenses and inherited assets on the horizon. Our primary homes are expanding, while our property lines are shrinking. When that isn’t enough, we begin looking for a second home.
Even with all-time low interest rates, some buyers are being tempted to buy more house than they can afford by opting for interest-only loans. They are counting on continued increases in prices and continued good times in the economy. This is a little scary.
With rising inventories, real estate may take a breather, but I believe this market will continue to be good. Don’t get greedy, though. Look at real estate as a long-term investment. Buy in an area which will hold its value. Buy what you can reasonably afford. If you can’t afford the fixed rate payment on a 30-year mortgage at these low interest rates, maybe you can’t afford the house.
A place you love?
Remember the real estate mantra, “location, location, location.” Location will set the price on the property, and the continued attractiveness of the location will determine your rate of return. More than anything, pick a place you love.
Yes, it’s an investment, but it’s also where you live.
Commercial development is following residential development and led me to move my office from Clinton to Highland Colony. This parkway has become a premier place for professional offices, but, more than anything, it has changed my attitude. Clinton is still where I spend my evenings, but my days are spent in Ridgeland. I had to follow “location, location, location.”
So, don’t let the bears frighten you away from real estate, but don’t get carried away by stories of easy riches. At the end of the day, you just want a place you can call home.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com. Her column appears monthly in the Mississippi Business Journal.