Have We Hit a Low in Real Estate Prices Yet?

by George Leong, B.Comm.

As many of you know, I feel that the strength of the economic recovery will largely depend on the recovery in the jobs and housing markets. Both are showing signs of slow recovery, but the pace is relatively slow. With rates for mortgages at record lows, there has been a flight to foreclosures, where real estate investors are buying property at cheap prices and waiting to cash in when the housing market finally begins to grow again. I’m not a real estate investor or expert, but it does make a whole lot of sense to buy low and sell higher. The question of course is: have we hit a low in real estate prices yet?

The recent existing home sales came in at 5.1 million units sold in August, which was below the estimate of 5.35 million as well as the 5.24 million in July. New home sales for August were also weaker at 425,000 units compared to the estimate of 440,000 and 426,000 in July. Clearly the numbers indicate some stability returning to the housing market, but we are clearly not there as of yet.

The problem I continue to see is the weakness in housing prices. On Tuesday, prices of homes in the U.S. jumped for the third straight month and were above estimates. The key S&P/Case-Shiller composite index of house prices in 20 metropolitan areas reported a rise of 1.6% in July, significantly higher than the estimate of 0.5% and above the 1.4% increase in June. A look at the 10-city index showed a 1.7% rise in July compared to 1.4% the previous month.

The rise in housing prices is positive, as the inventory of foreclosures decline and resale homes begin to see increased buying action. I have noticed this where I live, which is a large metropolitan area. After a few years of declines, I’m beginning to see a lack of inventory and some multiple offers for some homes. This is positive and I do expect this trend to inevitably improve as the jobs market strengthens.

Material property wealth is important to homeowners; especially helping to dictate the way they spend. Confidence translates into increased spending, especially on bigger ticket items such as furniture, appliances, electronics, and home renovations.

Over the next few quarters, watch to see if the improvement in the housing market and prices continues to gain. If so, it will drive spending and economic growth.

So, while I feel that the economy has stabilized, there is still a question of the strength of the economic recovery, especially in the fourth quarter. I believe that the economy will not show strength until at least sometime in the first half of 2010 and this will be impacted by the jobs and housing markets.

In all, there are positive signs and let’s hope things will continue to improve. The key factor in housing will be whether the momentum continues after the end of the help from the government for buying homes.