Monday, January 10, 2005

Forecast 2005 - Best Case for Buying Real Estate

What's not good for the economy may be great for the housing market among other key factors to keep an eye on this year.

Slow job growth and an economy that loses a little steam might be just the ticket for the housing industry next year in some experts' opinions.

David Lereah, chief economist for the National Association of Realtors, thinks that scenario will keep mortgage rates low and provide a "positive shock to the housing sector."

Mark Dotzour, chief economist at Texas A&M University's Real Estate Center, calls moderately slow growth, low interest rates and positive home price appreciation "the perfect storm for residential real estate sales volume."

While others believe job growth would mean that more people would be able to purchase homes, most agree that continued rock-bottom interest rates would be ideal.

At this point, NAR is forecasting a second-best year. 2004 ended up being the best year. But, next year could turn out the same way with record home sales.

The dream situation would be price appreciation rates between 5 percent and 7 percent instead of rates in the double digits. Rates in the single digit range would still be high enough to interest investors, but not high enough to seriously inhibit affordability as higher rates might. A modest price appreciation would be the best case modality; if an increase happens to precipitously, too many buyers may be priced out.

Another best-case is that the economy also would keep improving long enough for the Baby Boomers' wealth to continue. This huge cohort is investing heavily in second homes. The market also has reaped a benefit from foreign investors/the dollar's weak value against key currencies such as the Euro and Yen. While some see the dollar's continuing weakness a worst-case, others view it in a more positive way. If the trend continues, foreigners will continue to invest in real estate and keep prices in good condition.

If the stock market continues to improve, investors generally turn from real estate and back toward stocks and bonds. But many feel that's not likely to happen as investors are still extremely wary of the market secondary to distrust of corporate accounting and an underperforming stock market.

From a broader economic perspective, no real shocks to the economy are anticipated. Oil prices most probably will continue to drop, decreasing inflationary risks/concommittant rises in mortgage rates. As always, oil prices hang over the stock market.

Overall, investing in real estate, whether as a first home, investment property or second home most probably is the best place for your money in 2005.

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