Not long ago, the U.S. real estate market was in a severe depression.
As housing prices declined from their peak in 2006, it triggered one of the worst global financial crises in history as banks collapsed, businesses failed, unemployment spiked, and people lost their homes.
In total, the housing depression lasted over 5 years as the S&P/Case-Shiller U.S. 20-City Composite Home Price Index collapsed from 206.6 in April 2006 to 137.1 in February 2012 – a decline of 33.64%.
Of course when home prices fell, entire industries fell right along with it including residential and non-residential construction, manufacturing, wholesale and retail trade, mortgage lending, and real estate – just to name a few.
But although the carnage is still fresh in most people’s minds, fortunately the worst is behind us.
In fact, since the depths of the depression, housing prices have rebounded nicely with the S&P/Case-Shiller U.S. 20-City Composite Home Price Index reaching 171.6 in April 2014.
Yet still, even with the housing market back on solid ground, activity in the sector has lagged behind the rebound in the greater economy.
For example, new home construction remains weak. Housing starts in the U.S. have yet to recover to 1993 levels – let alone pre-recession levels. Even though the U.S. population has grown by 56.2 million people, there are less new homes being constructed today than there were 2 decades ago.
Of course, although this statistic is indicative of weak housing demand, it also reveals just how overbuilt our housing market really was and still is to this day.
That’s why the time to buy real estate is now.
30-year mortgages today are less than 5% – some are less than 4%. And what’s more, borrowers have incredible flexibility to borrow at variable rates or to lock in fixed rates at any time if they believe interest rates will rise in the future.
This all adds up to an amazingly attractive environment for investing in real estate:
Home prices are cheap. Borrowing money is cheap. And there is ample housing supply to choose from. For buyers, it doesn’t get any better than this.
But of course, as you know, this buyer’s market won’t last forever.
Perhaps Berkshire Hathaway CEO Warren Buffett said it best.
When asked about the sluggish rebound in housing construction, he said:
“You would think that people would be lining up now to get mortgages to buy a home… It is a no-brainer. But so far home construction pickup has been slower than I had anticipated… Household formation falls off dramatically in a recession, at least initially.
But that doesn’t last long.
Hormones kick in and in-laws get tiresome, too.”
Eventually he expects housing to come back in a big way. And you should too.