Home owners still expect their property to gain value in next few years
By Justin
Hunter
Has the past market
“boom” corrupted our judgment and expectations?
We all know that from 2000 to 2005, the U.S. real estate
market literally broke records left and right as owners
experienced 100 to sometimes 500 percent value increases
within that time frame.
But this is a new market. For about a year now, sales
have been setting new records for largest year-over-year
declines. Home prices have not been nearly affected
but did just decline for the month of August, marking
the first national decline in median prices since 1996
(according to the National Association of Realtors).
So, why do home owners still expect their properties
to increase in value?
Realty
Times columnist, Al Heavens, provides reported information
supporting Americans’ optimistic outlook on this
new market, in his October 5, 2006 article, “Most
Americans Believe Houses Continue to Gain Value.”
“I've spent the last few
Sundays visiting open houses, and have come to the conclusion
-- reinforced by conversations with real estate agents
-- that most sellers remain unconvinced that this is
buyer's market now.”
You do not have to believe that there is a housing bubble,
but you cannot ignore the fact that the market is gearing
towards buyers. So many sellers are still trying the
market with last year’s prices. They think the
market is still in their favor.
Heavens believes that sellers may have this mentality
due to a recently released survey by RBC Capital Markets,
which found that about half of all homeowners
still expect at least 5 percent annual increases in
their home values over the next few years.
“The
survey of 1,003 people, conduct nationwide in September
and announced at meeting in Orlando, also found that
25 percent of homeowners have already paid off their
mortgage -- twice the number of people with risky variable
and interest-only mortgages (13 percent).”
Those who entered the end of the housing cycle with
variable rate and interest-only mortgages
are at a definite risk and disadvantage once their mortgages
renew. But is there enough concern about how drastic
mortgage payments have the possibility of increasing?
“Nearly
40 percent of those with variable rate and interest-only
mortgages are concerned with their ability to meet higher
payments, while 13 percent haven't even considered the
ramifications. While this is a fairly small segment
of the overall survey (about 6 percent), it suggests
material risk to this segment of the population.”
Scot Ciccarelli, managing director and equity
research analyst for RBC Capital Markets, “said
that many of those surveyed in this category didn't
seem well prepared for the higher monthly payments these
mortgages will eventually bring.”
Even though real estate expectations are lower than
they were a year ago, most people do not grasp the concept
of a falling market that will optimistically have a
“soft landing” but has the possibility of
a “crash.”
As real estate values do decline, consumer spending
will most likely decrease as home equity levels will
slow. The economy will be sluggish until the market
picks up, which will impact everyone’s outlook
and mentality.