Monday, January 22, 2007

Short-term pain, long-term gain (continued)

Short-term pain, long-term gain (continued)
During the early 2000s, conditions were characterized
by skyrocketing consumer demand due to low interest
rates, demographic changes and the relative weakness
of the stock market as an investment vehicle. The
supply of homes available for sale struggled to keep
up with demand. As a result, home prices escalated
dramatically–from a median of $152,000 in 2000 to
$228,900 in 2005, a jump of 50 percent.
While the spending capabilities of Twin Cities
consumers did increase in the same time period
thanks to the aforementioned low interest rates and
a slow rise in wages, they didn’t keep pace with home
prices (Figure 2).
This is a chief cause for the current slowdown in
sales. Consumers will only spend what they are able
for goods and services, and housing is no exception.
The buying environment must become more
hospitable for consumers to return en masse. That will only
occur on a meaningful scale if there is a pause in home price
growth.
Thanks to the housing slowdown, that is exactly what’s
happening. After reaching the lowest point in the last two
decades in July 2006, affordability conditions have rebounded
since July to the highest point in 18 months (Figures 3 &
4) thanks to falling interest rates and a pause in home price
increases. This makes homeownership more likely and desirable
for fi rst-time home buyers—a necessity for future growth
because an accessible market is a growing market.Keeping Perspective
It’s important to remember that there is ample business
opportunity for REALTORS® no matter the market conditions.
What we’re currently experiencing may seem challenging if
viewed through the rose-colored glasses of the early 2000s. But
it pales in comparison to the near-lethal cocktail of high-interest
rates and stagfl ation of the early 1980s.
While a rapid return to boom-level sales is unrealistic, our
current buying conditions are incredibly favorable relative to
past history. 2006 was a sea change for our market, and as
the waves settle in 2007 and the market pause improves these
conditions even further, the stage will be set for a healthy
future.

Reprinted from the January/February issue of The REALTOR®. Copyright © 2007 by the Minneapolis Area Association of REALTORS®.

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