Are Real Estate Prices Headed Up or Down??? (Part 1)

So what’s going on with housing? And should you be investing in real estate right now?

First, let’s take a look at what happened in 2012 …

In the U.S., home values rose by $1.3 trillion last year. To put that in perspective, in 2008, when housing prices collapsed, home values decreased nationwide by $3.2 trillion … so that’s a nice-sized rebound.

And guess where many of the top growth cities were? Yup, right here in California. In fact, the top 3 were all in the Golden State:

#1) Los Angeles ($122.1 Billion)

#2) San Francisco ($93.3 Billion)

#3) San Jose ($54.7 Billion)

Does the trend continue? Or have we blown up another bubble that’s ready to burst?

I’ve heard compelling arguments from both camps. And what’s interesting is that depending on what stats and economic indicators you track, a compelling argument can be made for either side.

Here are some economic factors that point to housing prices going down:

  1. Unemployment is still high. Over 8% nationwide, and 10%+ in California. 12 million people still remain unemployed in the U.S.
  2. Spending patterns are down. In the U.S., over 10,000 people each day are hitting age 65, with many of these people officially retiring. What does that mean? A ton of money being sucked right out of the economy, and fewer dollars typically means economic contraction, not expansion. This is a trend that will continue every single day – for the next 18 years.
  3. Fiscal Cliff deal – This was supposed to be a combination of tax increases and spending reductions. Part 1 took care of the increase part, but we’ll see what happens in the next few weeks on the reduction part, if anything. So far, the Fiscal Cliff Deal has resulted in:
  • The top income tax rate going from 35% to 39.6% for the highest earning Americans
  • Payroll taxes going back to 6.2% from 4.2%
  • Capital gains rising to 23.8% (cumulatively) from 15%
  • Death taxes rising from 35% to 40%

Here are some economic factors that point to housing prices going up:

  1. Tight supply – In many areas throughout California, only 1-3 months worth of inventory exists. For example, right here in my own zip code, there’s only 1 months worth of inventory, meaning at the current sales pace, all the available inventory in my zip code would be snapped up within 1 month!
  2. Interest rates are at historical lows … and the Federal Reserve appears committed to maintaining money-stimulus programs.
  3. Foreclosures are down significantly. In 2012, NOD’s were down 48.9%, REO inventory decreased 35%, and foreclosure sales were down 28%.
  4. More Government intervention programs like: National Mortgage Settlement Program; HAMP; the California Homeowner Bill of Rights. The net effect of all these programs? A slowing up or even elimination of the foreclosure process.

Anyway, like I said … there’s compelling evidence on both sides.

So what’s your take? Are prices headed up or down?

Should you be investing in real estate right now? If so, what do you think is the best strategy?

Buy and hold? Fix & flip? Take-Overs?

Let me know what you think … and I’ll weigh in on my opinion next week.