After the housing market cratered – and foreclosures skyrocketed – during the Great Recession, 2013 produced a welcome rise in property values. What created this turnaround, and can you take advantage of it?
Property values are influenced by many factors, but the primary reason for the recent rise in home prices was simple economics – supply and demand. Limited supply combined with rising demand equals rising prices in any field, and housing is no different.
An extreme market will get an extreme correction, just like a spring that is stretched near its limit. The subprime mortgage crisis arguably led to a housing bubble of overstated value that was out of line with incomes and affordability. Once the bubble burst, a large number of homeowners ended up underwater – owing more on their homes than they were worth – and the result was a massive increase of foreclosures.
With more homes suddenly on the market and fewer people able to afford them because of the overall economic recession, values continued to sink – an extreme correction to an extreme overvaluation.
This effect bottomed out in 2012, and just as with the overstretched spring, the next rebound began. Investors and speculators ruled in 2013, as relatively cheap home prices combined with low interest rates gave investing groups the opportunity to snap up housing bargains before individual homeowners were in an economic position to buy. As a result, property values increased, even if individual homeowners weren't driving the change.
Many analysts expect property values to continue to rise, but at a slower pace (around a more typical 3-4% growth) as supply and demand begin to even out.
On the supply side, foreclosures have abated and new home construction has begun to recover. People who couldn’t (or wouldn't) put their homes up for sale are now back in the market as the value of their homes approaches an acceptable sale value. As a result, the housing supply is expected to rise, damping the growth of property values.
Interest rates, while beginning to rise, remain low by historic standards. These increases, coupled with a rise in home prices, makes real estate less attractive to investors. Meanwhile, more homeowners are recovering from being underwater and are getting back into the market while pent-up demand from people who could not afford to buy is being released. In other words, the overall market still looks decent for buyers, but they are switching from investors to more traditional homeowners.
Given the above factors, continued slow growth of property values seems likely. How can you benefit from this growth? Here are three possibilities:
- Refinancing Rates – An increased home value helps lower your LTV (Loan-to-Value) ratio, which may allow you to secure better rates if you are refinancing your home – and if you were underwater, it may give you to the ability to refinance where you couldn't have qualified in the past (even under Federal assistance programs).
- Sale Value – As described above, your home value may have increased enough that selling it brings a sufficient return.
- Home Equity Loans – An improved home value may make it easier for you to borrow against your property for such things as a home improvement loan and receive favorable rates.
In summary, property values typically follow basic supply and demand, and we are in a market that is slowly stabilizing after a big shock. With proper timing and regular monitoring of prices, you can meet your goals whether you are buying, selling, refinancing, or improving your home. If buying or refinancing is on your radar screen – and you’d like to have multiple lenders compete for your business – MoneyTips can help. Click here to learn more.