Market Strategists Say The Boom is Coming: The Time to Build is Now
Excerpts From JP Morgan Funds Market Insights
By Dr. David Kelly and David Lebovitz
Chief Market Strategist
J.P. Morgan Funds
While no one should understate the pain and destruction caused by the bursting of the housing bubble, it has had one undeniable effect: Across a wide range of measures, it has left the United States with its cheapest housing market in decades.
However, price is only part of the story. Economic malaise, bond market complacency and the active intervention of the Federal Reserve have reduced mortgage rates to their lowest level in modern history.
On average, since 1975, U.S. residential real estate has been worth about 55% more than the cost to build new- that is to say, land has represented about a third of the total value of residential property. In the housing boom, home prices rose much faster than construction costs so that by the middle of 2005, the value of houses was implicitly twice what it cost to build them…
On a variety of measures, U.S. home prices look very low. This, in itself, does not guarantee that they are about to turn. However, trends in supply, demand and inventories strongly point to rising home prices in the years ahead. If the housing market does begin to recover, what could this mean for the economy? The short answer is: a lot!
A rebound in home prices would have a dramatic impact on household net worth. Housing is a leveraged investment. As mentioned earlier, even ignoring today’s super-low mortgage rates, home prices would have to rise by roughly 27% from current levels to get back to their average relationship to average household income. If this took five years and average household income grew by 4% per year over that period of time, then home prices would rise by roughly 55% over the next five years. However, since home equity now represents just 40% of home prices, an increase of 55% would more than double the housing wealth of U.S. households. All signs point to the here and now. In short, you do not want to miss out on the next housing boom!
However, perhaps most important would be the general effect on confidence of a rebound in U.S. housing. For years, the purchase of a home was a point of celebration, a first solid building block for a family’s financial future. The optimism that embodies this has been sadly lost in recent years, and the fretful pessimism that has replaced it has discouraged risk taking across all dimensions. When housing recovers, it should improve the public mood, spurring more spending, more hiring and more investing. A recovery in the nation’s economy is central to improving family fortunes, today, and more than ever before. That is why it is important for America to realize that when it comes to housing, now is the time to build.
As the New Year begins this seems to be the most prevalent time that building plans kick into overdrive. Whether you are scaling down or upgrading, as the article clearly states there has never been a better time to build that new custom home. To schedule a free no obligation consultation give us a call or click here to have a member of our team get back with you promptly.
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