When is it going to happen?

I think that I've mentioned here before that one of the things you get when you're in my line of work is a lot of questions from the public at large. It's probably something like being a doctor or lawyer in that when you meet people and they find out what you do, all the questions (and occasional horror stories) come out. I'm OK with that. If you know me, you probably know it's harder to shut me up than anything when I start talking about real estate.

So several times over the past few months, I've met folks and they find out that I'm a Realtor, and inevitably some variation on this question comes about the market: "When are we going to see prices back up where they were?". I think that if you own a home, you're hoping against all hope that I'll tell you that it's right around the corner.

Well, it's not.

Will we get back to 2005 price levels again? Yes, of course we will. Markets tend to work in cycles, but with the ups and downs, the trend line over the long haul is always up. I moved to California in 1982, and when I heard people talking about real estate, everybody was saying that they wished that they'd bought a house 20 years before. Then I bought my first condo in 1992, and everybody told me that it was too bad that I didn't do it 20 years ago. It's a constant throughout the 27 years that I've lived in the Bear Republic - gee, real estate would have been a great investment 20 years ago.

And what do you figure people are going to be saying in 2030?

So here's how I see this - most of us who own a home have a piece of property that would sell for about half of what it would have sold for four years ago, give or take. If you bought it four years ago, that really hurts. But if you aren't over your head on the payments, the time will come when you'll see equity again. The problem we have right now is that a lot of folks can't make the payments. Either the adjustable rate is biting them in the butt, or they've had a loss of income, and as a result we're seeing a lot of foreclosures. I've been hearing more in the news about people doing "strategic defaults", and I have some opinions about that idea that are better saved for another post, but I don't think that accounts for a huge portion of what we're seeing now.

So back to the title of the post: When is it going to happen? When are we going to see a recovery in prices that will get us back to 2005 levels. The real answer here is "It depends". Don't you just love getting vague answers?

But it does depend on a lot of things. Any recovery we see in the foreseeable future is going to have to be driven by affordability. People have to be able to make their payments. So part one of the recovery has to do with household income levels. The bigger economic picture needs to improve to a point where there are good, solid, long-term jobs. As long as we are seeing double digit unemployment, we can probably figure on just about zero in terms of housing price recovery.

Part two has to do with lending. Gone are the days when you could walk into a mortgage office and tell them that you make $100K a year and walk out with a pre-approval for $500K on a stated income loan. And you aren't seeing a lot of lending done with adjustable rate, interest only mortgages any more. You actually have to document income now, and if you do take out an ARM loan, you probably have to qualify for the highest payment on the schedule rather than the intro payment. And zero down? Unless you qualify for VA, forget about it. Ain't happening.

These are all probably healthier things for us in the big picture, but short of our financial and government institutions waking up one morning with amnesia - which admittedly has been known to happen - those days are probably gone for a long time. And in retrospect, the thing that drove prices up to astronomical levels wasn't so much demand as it was access to easy money. Easy money has left the building. We'll probably see it again some time in our lifetimes, but not for a while.

So the bottom line is this: I think that a reasonable expectation when we start to see appreciation again would be something on the order of 3-5% per year for a while, with maybe a few better years here and there. Certainly nothing like the explosion that we saw from 2002-2005. So working with that level of growth, we're probably looking at probably 10 years minimum before we get back to our previous peak. If we get there a lot faster than that, I'd be concerned about sustainability.

I hope everyone has a fun and safe New Year's celebration. See you back here next week for a fresh look at the first market stats of 2010.