Commercial PropertyIs The Perfect Real Estate Storm Gathering Wind Again?
The markets are fascinating to watch and yesterday was particularly interesting. A spate of mixed reports just released on October 5, 2004 shows the perfect real estate storm may have picked up wind again.
On the optimistic side, the National Association of Realtors revised its 2004 forecast to cautiously expect that the year may set a record for annual existing-home sales. Greater sales in the first seven months of 2004 suggest that existing-home sales will increase about 6.5 percent to 6.5 million.
To insure that these homebuyers, along with the previous millions who have driven home sales to record levels over the last eight years, stay in their homes and continue to pay interest to lenders, the ever-accommodating mortgage lending industry has created numerous ways to borrow against those homes with products that were unheard of a generation ago, including equity lines of credit and equity loans, which weren"t allowed in many states on homesteads including Texas until recently.
According to the Federal Deposit Insurance Corporation (FDIC,) the home equity line of credit, or HELOCs as they are fondly known in the trade, have played an important part in keeping consumer spending higher than it might have been, as homeowners have incurred $416 billion more debt from their HELOCs, up 41 percent from a year ago, according to a CNNMoney report. Thanks to housing appreciation, however, homeowners can still blow through a remaining $435 in untapped HELOC equity, up 52 percent from a year ago.
Real estate has been and probably remains the best place to put cash, or to collateralize for cash, but that party may be ending as crude hits an all-time record of $51 a barrel, and Starbucks charges an average 11 cents more for a cup of Joe starting today.
Americans have increased household and consumer debt by $1.7 trillion to $9.1 trillion, with mortgage debt accounting for 90 percent of that increase, writes Sarah Max, senior writer for CNNMoney.
Are we tapping our houses" equity because we can"t afford what we want otherwise or because there isn"t a way to borrow more cheaply and we"re going to ride that wave as long as we can?
It"s entirely possible that we can no longer keep up with the Joneses. Personal income is down in the oughts. In fact, according to the Bureau of Economic Analysis, income growth was better in 1996 than in 2004.
But the really scary part is that the weak labor market has caused the median household income to fall in real terms $971, $502, and $63 in 2001, 2002, and 2003 respectively for a cumulative loss of $1,535, a 3.4 percent drop over the last three years, according to the Economic Policy Institute in late August.
Meanwhile, the median cost of a home has inflated to the point that even with lower interest rates, borrowers have to have more income to qualify. In 2001, the median price of a home was $147,800, interest rates averaged 7.03 percent, and qualifying income was $37,872. By 2003, the median price of a home had escalated to $170,000 with mortgage rates at 5.74 percent and qualifying income at $38,064.
The national median existing-home price was $191,300 in July, up 8.7 percent from July 2003 when the median price was $176,000, said the NAR yesterday.
Incomes are going down, housing is going up, and Americans are increasingly spending more of their incomes on housing every year.
Adding more vinegar to the milk, U.S. employers are planning more job cuts according to a new report by Chicago-based Challenger, Gray & Christmas. In September, 2004, U.S. businesses announced a 45 percent increase in job cuts from August from 74,150 to 107,863. About 144,000 new jobs were created in August, and about 150,000 new jobs in September, which makes economists predict that the U.S. Labor Department"s jobless rate track should hold steady at about 5.4 percent.