Will Real Estate ever recover from the Great Recession?
Housing starts is just one metric observed on a regular basis in the financial news, and it provides a barometer on the health of the economy. In 2006, real estate was a significant part of the economy, due to the emphasis on new house construction, home improvement, refinancing, and all the other aspects of the real estate boom. A large portion of the employment figures was tied to real estate, for construction workers, real estate brokers, mortgage brokers, home improvement employees (at retailers like Home Depot and Lowes, for example), and other related industries. Merrill Lynch estimated that by 2005, real estate was driving US GDP growth: “More than half of all new private-sector jobs since 2001…were in housing-related activities.” [1] When the real estate sector nosedived, employment figures in the state of California and across the country nosedived, too.
Both new home sales and new home construction show a dramatic increase in the years following the natural decline from the prior peak in the late 1980s. These data do not include the volumes for sales of existing homes. The data are from the US Census Bureau and are seasonally adjusted. The data covers a span of about 50 years. What is significant is the unprecedented number of new homes (single family residences – SFRs) sold in this most recent real estate bubble. From these data I have created Figure 1, which shows that the sales of new SFRs peak at about 1,400,000 in June 2006, about 500,000 more than any prior peak in history. This is part of what made the housing crisis so unprecedented; the volume of sales was 50% more than at any other time in US history.
Figure 1. New Home (SFR) Sales (1963-2013)[2]
When real estate is booming, the people who own property are very happy. They talk about how much money their house is making while they sit at home. They feel richer and more confident in the future, because of their paper wealth. Sometimes, they brag to their friends about how their $500,000 home is now worth $1.5 million, even though they would never sell the property to realize that gain. All the while, the people who don’t own property feel awful. They say they should have bought in a few years ago, when prices were more reasonable and they could actually afford it. Now they feel as if they’ve missed the opportunity and are standing next to that escalator, watching people rise above them, while they remain on the ground. They may even become somewhat desperate, feeling as if they have to jump in now or risk never being able to qualify to own a home.
What you need to understand is that you can make the right decisions, if you are armed with the right information, so you can be prepared when those opportunities in life present themselves to you. The real estate cycle will come around, and it will offer those choices that can make you rich, if you choose. As I have stated before, the real estate cycle, like the other cycles I have described in other topics of this blog, will provide opportunities to “get in” when the conditions are optimal for your future benefit. But you need to have the correct information in front of you, so you can make that informed decision. You need to have the information I will present in the what’s next for real estate blog, which will provide a summary of the expected events in the near and long term that will determine when the next opportunity will arise to buy into the American Dream. Yes, real estate will recover and go higher than the last peak of the housing market. The question is, when?
[1] The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, by Charles R. Morris, 2008, PublicAffairs, a member of the Perseus Books Group, New York, New York, page 66
[2] US Census Bureau, New Home Sales, Annual Rate for New Single-family Houses Sold: United States, Seasonally Adjusted All Houses [Thousands of Units], 1963-2013