For months most real estate analysts, representing the nation’s largest real estate organizations, have been telling us to not worry about a bursting housing bubble (related to home prices). It wont happen, we were assured.
Now a noted Yale professor, Robert J. Shiller, tells us we should be vigilant about the possibility of a housing bubble burst. This could influence the plans of many home buyers, sellers and mortgage applicants in 2003 those who are considering acquiring a home and mortgage loan and those thinking about placing their existing home on the market.
Home prices have a historical tendency to crest and then fall in patterns that are similar to the stock market’s performance. But home price changes tend to follow stock market changes by a couple of years, he noted. Shiller is cofounder of Fiserv CSW, Inc., a home price research company, founded in 1991. It serves a client base principally comprised of mortgage lenders, insurers, and Wall Street firms.
Shiller pointed out that the underlying stability of the property market, keyed to the steady pace of productivity and production costs, has actually fallen when adjusted for inflation. Certain markets could experience price drops of as much as 10 percent in year 2003, he said.
Several markets where land prices have risen sky-high have experienced exceptionally strong housing price increases that could drop sharply if their local economies take a hit, he noted. However, he also concedes that a nationwide falloff in home prices is very unlikely.
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We’re experiencing something of a real estate investment boom in this nation. And, surprisingly, the property of choice is not commercial real estate or land it’s second and third homes purchased by individual families. Those properties, and mortgages to finance them, are experience sharp increases in sales.
The historically low mortgage interest rates and volatility of the stock market has motivated many people to turn to real estate for building their investment portfolio. And, while they’re at it, why not acquire the type of property they’ve been dreaming about for years a second home in the mountains, on a lake or on our Pacific oceanfront. It’s suddenly become the best form of investment, while satisfying their recreation needs and desires.
It’s been known for many years that ownership of a primary residence is the best form of investment for most families. That’s why our nation’s home-ownership rate has climbed to 67.8 percent, and all-time high. In recent months, families have suddenly realized that the investment benefits of owning their primary residence can be extended and expanded to ownership and financing of a second or even a third home.
In year 2001, nearly 6 percent of all homes purchased were second homes, according to data from the U.S. Bureau of the Census. And the numbers are rising. During the third quarter of year 2002, there were 3.6 million seasonal homes purchased (in the third quarter alone.) The Census data shows there are about 9.2 million second or vacation homes now held by owners in addition to their primary residences.
The ways in which families acquire a second home are widely varied. Some second homes are inherited or shared with other family members, it was noted in a survey conducted by the National Association of Realtors. Others originally were purchased as primary residences and then later became second homes when the household upgraded their primary residence.
However, an increasing proportion of second homes are purchased for and used as vacation home or investment properties or both. The motivations for owning a second home vary from the desire for a vacation getaway to the need to diversify an investment portfolio. The demand for real estate in addition to a primary residence is an important and growing segment of today’s real estate market.
The NAR survey revealed some interesting information about the buyers of second homes. It noted the typical second-home owner is 61 years old and has a household income of $76,900. The vast majority of second home owners consider their second home to be a good investment.
Nearly 78 percent of all second homes are vacation homes as opposed to strictly investment properties or land. The owners consider them to be their family retreat. Most vacation home owners never rent their second home, while most investment home owners never use their homes. About one in six second home owners over age 55 plan to make their second home their primary residence after retirement.
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Many families are now making major plans for year 2003, including the most practical steps to satisfy their growing housing needs. Some are now wrestling with the decision whether to purchase a new and larger home, or launch a remodeling project to expand and improve their existing home. Key elements in that decision-making process are how their investment in remodeling would impact the home’s market value, and whether or not the owner will qualify for the needed mortgage loan.
Some decisions are based primarily on the investment factor. Considering the recent volatility and often dramatic downturn of the stock market, many people are now concluding that real estate is the best form of investment. And what better way to invest than in their own home.
If a home remodeling and improvement project is planned strategically, it can be a profitable investment. If it’s poorly planned, it can be a loser, financially.
There are, of course, many variables and regional differences to consider, but generally the projects that are most likely to increase the property’s value more than its cost are kitchen and bathroom remodeling, the addition of a master suite, bathroom addition and window replacements.
This was determined in a study and report undertaken by Realtor Magazine and Remodeling Magazine. Their combined research resulted in the issuance of a comprehensive Cost vs. Value Report. In a typical case, the addition of a bathroom might cost about $18,000. If the house were sold a year later the extra bathroom would add $18,800 to the purchase price, it was noted.
The poorest type of remodeling is to add features that are uniquely designed for the owner, such as a dark room for photography film processing, or converting a garage into a recreation room. Such changes might satisfy the immediate needs and desires of the owner, but they could be a negative factor when marketing the property.
When making your plans and reading reports like this, keep in mind the variables like the home features that prevail in your immediate neighborhood. Your remodeling plan should be consistent with and complement the best neighborhood features and trends. Also remember that building materials and labor costs can vary substantially from market to market.
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Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features on real estate related subjects.