The classic novel by Charles Dickens begins with the following quote:
“It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way.”
This could be a descriptive of the real estate marketplace in many quarters across the nation today. The economic crisis which was predicated by unsound lending and investment practices has swung the pendulum almost 180 degrees in the reverse direction with tighter lending standards and much more over-sight to the process. Sometimes, with unintended consequences with regard to programs that sometimes created more confusion than the problems they were designed to solve.
So, today in the West Michigan housing market, we are observing a unique situation in which inventory levels are at the lowest level in a decade yet, home prices are rising at very modest levels after a free-fall in which we saw the average home price decrease 30-35% within the past five years. So, when homeowners hear that the market is in recovery, the natural reaction is to assume that recovery means that home prices will return to the level they were in 2005 – 2007, the boom years.
The truth is: they will not. And this is why. The increase in housing prices was artificial. Grossly artificial. Bolstered by poor economic policy and disastrous political mandates and pure greed and avarice, millions of Americans were put into the wrong mortgages or given access to mortgages before they had demonstrated the prerequisite financial acumen to sustain the rigors of home ownership. To add to the inferno, liar loans simply created stories about who a borrower was.
So, prices for homes rose as demand for homes rose. And since the process was largely based on unreality and unsound policies, the result was an artificial increase in what homes sold for which is demonstrated in this graph. Of course, this was an unsustainable situation. And in time, the bubble burst…hence the housing crisis.
The key thing to understand is that the market will NOT recover to those highs, nor should we wish that it would. Why would we want to re-create the hell we’re trying desperately to climb out of?
So what is realistic? Well, it we follow the healthy trajectory of steady, modest gains that an investment in housing has historically yielded, we are probably looking at prices which are in the range of what homes sold for between 2003 – 2004. If you gasped and said…’Wow, a decade of equity was wiped out” you are right. But, was the past decade truly reflective of healthy gains in equity…in my opinion, the answer is NO.
Housing is still a good investment. The massive course correction has been painful, but it was necessary. So, while you will not get an unrealistic price for your home, you can expect a fair return on your investment if you have owned your home for more than a decade or if you do not have a lien against your property. If you’d like to know more about how your specific neighborhood has fared, please contact us for a free analysis.
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