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Massive Changes in the Housing Market… What to Do

Posted on 01. Jun, 2013 by in all, Magazine Articles

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“Steve, I can’t manage to buy a house,” an attendee told me over the weekend in San Diego at Everbank’s Global Currency Expo. “The last house I tried to buy had 65 offers on it and sold well above asking price.” This guy was not alone.

Conference attendees fromFloridatoPhoenixtold me similar stories. “The deals are gone,” they said. So they’re giving up.

But fear not, my friends! Market price – or even “above-market price” – on housing in America is still a fantastic deal today. Let me explain – what’s happened in real estate is nothing short of extraordinary.

We went from a market with tons of supply and no demand to a market with no supply and tons of demand. Many people are giving up… they think the deals are gone… They think, “Why should we pay market price, or God forbid, above market price, for a house now?” I have an answer for you.

A couple weeks ago, I explained exactly how high home prices should go. In short, house prices nationwide are around $180,000. But by our math, “fair value” is over $260,000 today – about 45% above today’s prices. How can our “fair value” be so high? One major reason is mortgage rates.  When it comes to mortgages, most people fail to understand the incredible power of “compound interest.” To put it simply, it’s about realizing how much money you pay in interest on a 30-year mortgage.

House prices today are at about the same levels they were in 1979/80 (adjusted for inflation). Back then, mortgage rates were 15%. At that rate, you’d pay $620,000 in interest over the life of that loan.

 

By comparison, at today’s mortgage rates of 3.5%, you’d only pay $106,000 over the life of the loan. That is crazy!

As regular readers know, I have been extremely optimistic on U.S. housing – more so than any other major analyst on the planet. The market has been roaring back recently. The official statistics of home prices are always MONTHS old. But median existing home prices are up 12% over the most recent 12-month period (February 2012-February 2013). That’s the largest 12-month increase we’ve seen since late 2005… near the top of the housing bubble.

And the big boom is happening right this second. We now have tons of buyers and not much supply. The downside of this situation is you’re not going to find the same amazing deals you would have a year ago. The upside of this situation is Economics 101: With no supply and tons of demand, housing prices will continue to rocket higher.

Folks at the conference shared their frustrations with me. They feel like they’ve missed it… that they can’t get the great deal anymore. What most people don’t realize is that MARKET PRICE today is still a fantastic deal… Most people don’t understand compound interest and fair value. So most people today will back down… They won’t pay full price or more because they don’t really understand where we are now in housing.

In the grand scheme of things, full price today is still cheap. It takes a long time for house prices to reach fair value… They can’t jump overnight like stock prices. Housing is still incredibly affordable thanks to low mortgage rates. Coupled with no supply and tons of demand, we have a recipe for much higher housing prices in the next couple years.

Yes, it’s now much harder to get a good property dramatically below asking price. But buying at MARKET PRICE is still a bargain today. I am confident that you will look back on today’s prices in two years and wonder why the heck you didn’t ACT.

The market has changed… but don’t worry so much. Housing is in a new bull market. And it is just the beginning. Our uptrend is finally here. And it could last for a few years… at least. Good investing!

A version of this article by Dr. Steve Sjuggerud, first appeared on April 9, 2013 in the Daily Wealth, published by Stansberry & Associates Investment Research, an independent investment research firm.  You can visit them at www.stansberryresearch.com. Reprinted with permission.