Where is the Housing Market Headed from Here?

The Wall Street Journal recently did an opinion poll of homeowners about where they thought their home values would be heading in the next several months and the results were quite surprising. Housing prices have dropped significantly from their peak in 2007, but according to the study, the average homeowner believers that their home’s value is going to rebound in the next five to six months. Unfortunately, with the excess of available houses for sale on the market, that simply will not happen.

Since the housing market peaked nationwide, many real estate markets have dropped significantly, with the worst hit areas dropping 35% in value since their peak. We cannot expect a quick recovery for a number of reasons. There are still many homeowners “on the edge” that simply cannot afford the homes that they live in and will likely be foreclosed on. Areas with foreclosed homes simply do not fare as well as those that don’t.

There is also still a glut in the market of homes that were built within the last few years by investors sitting on the market. It will take some time for the market to consume the amount of available homes before it makes any sense to start up major new developments in most areas again. This is not to say that there are a few exceptions in areas that did not see a major real estate bubble.

Although we won’t see a quick rebound in home-prices, you really don’t have to worry if you plan in staying in the home that you have now for the next few years. It’s really only a paper loss that will likely rebound by the time you sell it several years down the road anyway. If you have a reasonable amount of equity in your home and plan on selling it, you might take a loss on the home that you sell, but you will probably pickup an equal bargain on the next home that you purchase, so the loss will be negligible.

The only people that are in real trouble are those that bought homes during the peak of the market but do not have any equity in their homes to absorb any potential losses. Since they were unable to place a reasonable down payment on their homes, it is a reasonable guess that they also do not have any amount of cash to swallow the loss from selling their home. They simply took on too much risk by buying a home they could not afford and will have to accept the consequences of doing so.

If you are a home-buyer, now is one of the best times in the last several decades to buy a home. Home prices are very low comparatively to what they have been in the last several years, mortgage rates are sitting around 5% (a near record low), and the government will give you an $8,000 tax credit if you buy a home during this year.

Ultimately it’s important to remember that real estate is not “guaranteed winner” as an investment, but that doesn’t mean you need to panic either. If you’re a typical home-owner and you have a reasonable amount of equity in your home and plan on staying there for a while, you have absolutely nothing to worry about.