Depending on where you live and work, you have probably observed a decrease in property values over the past year or two. Not only has the economy put the brakes on sales, the change has been so drastic that we have experienced an over-supply of housing all over the country. Some regions have been hit harder than others, and some parts of town have been hit even harder than others.
If either George W. Bush, Barack Obama or Congress are guilty of anything relating to the downturn in property values, they are probably guilty of over-stimulating the economy, not under-stimulating it. For this reason, it may very be a sound practice at this point to do nothing, as opposed to artificially stimulating it more. Artificial stimulation would likely make matters worse in the long term. Yes, Big Brother could come in and take monetary action to further stimulate the real estate economy. If so, this would require money, which would only increase the national debt, provide a temporary fix to the market and actually make the housing recession longer. The Japanese found this out the hard way in the latter part of the past century, and they spent a decade getting back on track economically.
All is not as bad as it seems, however. A positive development has occurred over the past 12 to 24 months to help the situation, even though you and I have not been able to personally feel the results. It is called inventory reduction, and yes, it is painful. It has cost us many jobs and has eroded our retirement plans. Many housing developers have gone bankrupt, while others have halted new product and have dwindled their inventory down to levels much lower than what we saw at pre-recession levels. Many of the houses were foreclosed upon. Some were subjected to short sale-type technique, where banks were involved in loan workouts and the properties were sold. The stronger of the home builders have reduced their number of new starts, offered existing inventory at deep discounts and have curtailed their development of new projects. All of this spells a smaller supply of new homes on the market, which is good medicine for a sick real estate economy.
This good medicine, however, has wreaked havoc on the values of our homes. All of the foreclosures and price-cutting has created such a glut in the market that prices have been suppressed to levels not seen in years.
So with all of this inventory reduction, when will it translate to increases in property values? The answer is not anytime soon. Yes, help is on the way, but do not look for the cavalry moving ahead at a fast pace and making a cloud of dust with the bugler leading the charge. Expect more of a Sunday afternoon stroll of the horses, slowly but surely leading us to the front line. It took us a long time to get into this mess and it will take time to get us out of it. We still have hurdles to overcome. The banking industry is far from able to get a clean bill of health. If we believe that it has just digested an oversized meal and is getting over the indigestion, we must not forget that we still have credit cards to swallow and delinquent commercial mortgage loans to consume. These are not directly related to the housing market, but they will create a ripple effect.
In summary, the worst of the housing debacle is over. Much, however, is left to be done. There are still too many homes on the market for our slow economy to absorb. Home appreciation will take place in a less robust way than we have become accustomed to. Over the next few months, there will be fewer buyers and more-cautious lenders. Meaningful home price appreciation can only come when unemployment abates, the stock market improves, banks become more aggressive about lending money and the glut of homes on the market has been sold. This should not be rushed and must be handled in an orderly manner.
We are looking at two or three years, in my opinion, before home appreciation can return. That can happen only when the economy returns to hitting on all eight cylinders.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company.