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Signs of Light - 7 Year Cycle?

Posted by:  Chip Poli
2011-12-01 11:39:06

Interesting pending home sales numbers lead real estate professionals to believe that there are glimmers of hope, if not rays of sunshine on the horizon.

Needless to say we are optimistic here at Poli Mortgage about the future of real estate, we’re more optimistic about the future of America, maybe that’s where we derive our positive attitude.

The last few years have been tough if you’re a homeowner looking to sell your home, that is undoubtedly true but, numbers out of Washington, DC yesterday may give you something to be a little perky about today.

NAR or the National Association of Realtors reported that Pending Home Sales Index numbers were up nationally in October to an index rating of 93.3 that’s an increase of 9.2% form the previous month of September when the index stood at 85.5.

The PHSI, as it is referred to, is a forward looking index that calculates the number of pending contracts in the market place. *the PHSI does not represent closings, it represents signed contracts, a leading indicator of overall activity.

The important thing to note about this spike is that nearly 30% of these pending contracts were engaged by Real Estate investors. This is noteworthy because investors tend to move on Fundamentals and not on Emotion. If more investors are fundamentally agreeing that the time to buy is now, then we may just be dragging our keel, at or at least near, the bottom of the real estate market.

Northeast PHSI Numbers

Of significant note is the regional index, particularly here in the Northeastern section of the United States.

The Northeast Region jumped by a enormous 17.7% month over month (Sep – Oct) and 3.4% increase form 1 year ago.

The Midwest enjoyed a 24% gain month over month and the South enjoyed over 8% increases.

The West actually slipped a bit by .3%.

The Northeast and the West will typically lag at the early stage of a recovery due to much higher average home prices.

Once a recovery begins to gain steam however, we will see the Northeast and the West build at a slightly more rapid pace as high quality buyers begin to jump into the mix.

New Normal

It is important to note that a return to bloated levels seen in 2005 are unlikely any time soon. The meteoric rise that occurred between 1998 and 2005 was an anomaly and not the norm.

The real estate market will find a new normal in coming years even as inventory from Fannie Mae and Freddie Mac bleeds into the market place, this is a potential issue that has yet to be completely realized. Hopefully the new normal is more of a steady pace upward starting next year in 2012.

The Fed and other meaningful Government Agencies have been pretty clear that they intend to keep interest rates at artificially low levels for the foreseeable future, of course this could change at any moment but, we are still seeing record low rates combined with solid borrowers.

Loan Quality

One important aspect of the lending markets over the past few years has been that loan quality across all loan types is the best it has been in history, on a national aggregate level.

Loan quality combined with very low fixed rates will typically lead to a much lower future foreclosure rates and delinquency rates, as homeowners do everything they can to maintain good credit and record low relative monthly housing costs.

Seven Year Cycles

Seven Year Cycles in Real EstateBy no means a scientific indicator, more of an amusing side note (kind of) I would like to point out the seven year cycle that is not only appearing in inflation adjusted home value graphs but has appeared in financial graphs in other markets.

If history is an indicator and it always is, 2012 could be a great year for America.

In 1984 inflation was raging and interest rates were at staggering levels with 30 year bonds trading around the 14% mark. Even with those high rates people began buying up homes and we went on an approximate 7 year run before things bottomed big in 1991.

In 1991 Real Estate had become drastically over cooked and anyone who knows anything about history will note that a blood bath occurred and credit markets seized. A classic “credit crunch” that left many investors in commercial real estate and owners of residential property in tough shape.

By 1998, after 7 years of stagnation, people had begun believing in real estate as an investment vehicle again and credit markets had opened up with liquidity flowing freely on the hopes of internet billions. The internet didn’t technically disappoint, it just turned out that wasn’t really going to be a $30 Billion company. (Topic for another day)

I remember sitting down in my sales manager’s office in September 2005 and saying “hey, does it feel like things are slowing down a bit?”. Well, they certainly did slow a bit. No need to even elaborate on that one. *Important to mention that I was not with Poli Mortgage at the time, I don’t think things have ever slowed down around here!

Needless to say the 2012 story has yet to be written.

It is fun to speculate though isn’t it?

What do you think 2012 will bring?

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