Real Estate Rebound Has Weak Foundation

What's happening with the housing market? Are we on the road to recovery or have we just paused before the next stage of the decline? Prognosticators can't seem to decide, as the dismal real estate market has left homeowners and market watchers in a state of shock. Looking backwards in time, it's easy to understand their dismay.
Going Up
Since the Pilgrims landed in
Plymouth, national real estate prices have climbed and climbed. Despite regional downturns, real estate was a sure bet. In fast-growing locations such as Miami Florida and Las Vegas Nevada, price increases over the past decade have been astronomical. Buyers stretched their budgets to get bigger homes as a solid economy fostered optimism. (Check out How Does The Economy Affect House Size? to learn more about this trend, but beware: everything that glitters isn't gold.)

Speculators and Decline
Speculators poured money into the housing market, buying and flipping everything from condominiums to McMansions. The influx of ready buyers added fuel to the fire of rising home prices. Like every other misguided get-rich-quick scheme, it worked for awhile. And then the economy took a nosedive.

From Sacramento to Sarasota, the price of housing dropped and then kept falling further. Now, many of those speculators own properties that are in foreclosure. (For a closer look at how trying to rich quick can lead to the poorhouse, read Five Mistakes That Make House Flipping A Flop.)

Unfortunately, the crash didn't just hurt the real estate speculators. People who had followed the foolish advice to borrow against their homes and invest in the stock market also took a hit. Consumers who used their homes like automated teller machines, borrowing against them on the misguided belief that prices could only go up, were too. Even smart homeowners who bought only what they could afford and paid off their mortgages as quickly as possible saw their wealth decline as falling prices reduced the value of their homes.

Signs of Life
Now the home market is showing signs of life. Sales trends have turned positive and the price decline seems to have stalled. Optimism is creeping back, as everyone wants to believe that the worst is over. Unfortunately, there's still an undercurrent of fear rippling through the market.

A look at headlines of most major news publications shows the sentiment shifting by the day. Some experts predict that the worst is over. Others say it's just a dead cat bounce. What's a homeowner to think? It may just depend on where you live.

While regional reports of recovery are certainly good news for some people, the old real estate mantra, "location, location, location", is still as relevant as ever. If you're looking to sell a house in Sacramento or Detroit, you aren't likely to reap windfall profits anytime soon.

The Economy ...
Clinton campaign slogan, "It's the economy stupid", is a brutal but apt summation of what's happening in the housing market. While national unemployment in the United States is hovering just below the 10% mark, double-digit unemployment in some of the hardest-hit areas of the country and accompanying double-digit foreclosure rates doesn't bode well for home sales in those locations.

Regardless of where you live, three lessons from this economic downturn are clear: Smart homebuyers buy only what they can afford; debt is bad; don't believe the hype. (For deeper insight into home ownership and fiscal responsibility, read Paying Off Your Mortgage.)

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