The 2009 Residential Real Estate Market

What is 2009 shaping up like in the residential real estate market? That’s the question that many are trying to figure out, and while nobody knows where we will be this time next year, we can look at a few things that may give us a glimpse of what it likely will be like.

First, the theory behind the ever increasing need for housing is, of course, population growth. Estimates indicate that the U.S. population grew by 1 percent last year to 305,529,237 people. One percent would equate to adding a little over 3 million people to the U.S. last year. And, as is so often said, they have to live somewhere. The big questions? Where and in what?

2008 saw record decreases in home values, and they are expected to fall even further in 2009. Unfortunately, this is a near certainty that the prices will fall by as much or more than 2008 because further job losses are expected throughout the year. A report in the Wall Street Journal indicates that the value of homes dropped 18% nationwide from October 2007 to October 2008. For those of us in the Atlanta market, it showed a record decrease in monthly home value from September to October 2008.

Home prices will continue to fall until they get their historically correct price relative to income. This is highly dependent on the market being served, but in general outside the coastal regions, homes are still over priced by anywhere from 15-50%. Still. The coastal regions see an even bigger disparity – 50-100% or more and California is the proving ground of how home prices cannot possibly outpace income to the level that they did there.

Most of us are sick of hearing it, because it keeps being predicted to have happened (or soon to happen) and they keep getting it wrong – when are we going to hit bottom? Forecasters are now saying it will be the second half of 2009 or later. Personally, they should stop trying to predict “the bottom” because we’re not going to get there until employment turns around. And it’s a fool’s errand to attempt to predict when employment is going to stop seeing losses. This means that it likely will actually be at least 2010 before a bottom even has a chance of occurring. A recent study indicates that housing slumps like we’re in now last an average of 6 years – which means we’re only about half way through the current challenge.

Here’s an interesting quote regarding new home inventory.

“Home-building activity has declined so much that the backlog of unsold units is starting to be absorbed at a fairly rapid clip even in the face of such a slow sales environment,” said Morgan Stanley economist David Greenlaw, who added that inventories won’t drop to “manageable levels” for six to nine months.

In support of Mr. Greenlaw’s statement – and that is the stunning decline in new home building – is this chart from Dr. Housing Bubble.

Unfortunately, the month’s supply of new homes continues to climb – as a nation we are at a 12-month supply of homes. A normal supply of homes is usually in the 6 to 7 month range. Even as the number of new homes coming to market faces steep decline, the supply continues to increase because of the number of distressed homes coming on to the market. Distressed homes now make up about 50% of the homes on the market.

This article is particularly good at explaining where we’re at and where we’re going. The best part is the very last section, titled “The Daily Changes we will Face”.

Consider this blog an “executive summary” of the linked articles. If you have a keen interest in the residential real estate market, I would encourage you to read all of the linked stories in their entirety as they will give you a lot of helpful information on the 2009 residential real estate market.