Ten trends are quickly emerging in the U.S. housing market. We’ll walk you through what to expect.
Recent years have seen a boom in the U.S. housing market with home values rising and new homes steadily increasing. But now that the market is starting to plateau, what can we expect? A recent Wall Street Journal Online article walks us through 10 trends to watch for in real estate.
- Decreased space. Although there are plenty of wide-open spaces left in America, many people aren’t moving to rural Wyoming or middle-of-nowhere Nebraska. In coming years, space for real estate will be at a premium. Builders are finding it more difficult to obtain permits to build homes in thriving metropolitan areas, particularly along the coasts, and existing homeowners have become more savvy and dedicated in the struggle to block new building in their area.
- Budgets fit to burst. Many Americans have experienced increased home values, but others have not been as lucky. Housing is quickly becoming out of reach for many people. According to the Joint Center for Housing Studies at Harvard University, a third of American households spend more than 30 percent of their income on housing, while more than one in eight spend more than 50 percent. In many areas, such as Eastern cities and popular locales like California, very few people earn enough to reasonably pay for a home.
- Shrinking square footage. The size of have been getting steadily bigger over the past few decades, but according to some industry experts, Americans may start to seek out smaller homes that are closer to workplaces to avoid long commutes. Some predict that American cities will start to resemble European cities, with fewer square feet per person, higher housing costs and more midrise buildings. Many communities are also moving toward “walkable” communities, where home, work and play are all within a short distance. As a result of these trends, condominium growth will continue to soar.
- Risky lending. Lenders are constantly coming up with new, more affordable products that may involve more risk later on. In other words, affordable now may mean ludicrous later. Some of these solutions include interest-only mortgages and payment-option loans. Lenders have also recently decreased the amount of documentation needed to obtain a loan, and bank regulators have started asking questions about these practices. The result of these practices may be that some homeowners won’t be able to meet higher monthly payments once the “honeymoon period” is over and that affordable loans have artificially increased housing prices by allowing buyers to bid more than what they can afford.
- Your own private cash cow. Traditionally, homeowners have strived to pay off home loans as soon as possible. This no longer seems to be the case, as homeowners often refinance to take advantage of lower interest rates and swap their home equity for cash they can use for other things. Many people also use their homes as collateral for home-equity loans. This blasé attitude has meant an increased rate of consumer spending, as well as increased debt among Americans.
- Foreign investing. Many riskier mortgage loans have been a result of increased foreign investing. Many investors in Asia and Europe are investing in mortgage-backed securities and bonds backed by interest and principal on large pools of mortgages. One thing is clear: foreign investment is bound to continue to increase.
- Big builders get bigger. Currently, the top 10 home builders account for about 24 percent of the market, which is up from 10 percent in 1997. Big builders often have an advantage because they have the sway to obtain prime pieces of property. Ivy Zelman, chief housing analyst at Credit Suisse First Boston in New York predicts that future market-share gains will be slower and more expensive due to the big builders already having snagged the easiest market-share gains in fast-growing areas.
- Discount realtors. The Internet paved the way for many discount services, such as airline fares, but real estate agent commissions are still around 5 percent to 7 percent. However, many brokers are increasingly offering cost-saving deals, such as charging a flat fee for putting a house into a multiple listing service or for offering a limited menu of services. In exchange, sellers will offer an additional 2 percent to 3 percent of the purchase price to an agent who provides a buyer. Other brokers offer to rebate commissions to the consumer.
- Second, third, fourth homes. Because of the boom in real estate, many Americans have not been able to resist buying investment properties or vacation homes. According to the Federal Reserve, these properties have accounted for 14 percent of new mortgages last year, up from 7 percent in 2000. Although this helps to feed the strength of the market, it can also make it more volatile because these types of properties can more easily be dumped on the market than primary residents if it doesn’t work out for the owners.
- The importance of ranking. J.D. Power & Associates, a consulting and research firm known for surveys of quality, now surveys new home buyers. The surveys cover 30 large metropolitan areas and allow companies that do well to use their favorable results to attract buyers. Builders are now trying to keep customers happier by meeting more expectations and increasing communications. In an industry where the constantly changing cast of subcontractors makes it difficult to meet quality standards, homebuyers are gaining more confidence because of the power the surveys hold.