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For a trifecta to be in play, three separate entities must be predicted, and therefore exist, in a certain order, resulting in a positive outcome. Trifecta usually applies to betting, but in real estate it refers to the three items that will ensure the residential real estate economy is strong again in 2002: low interest rates, the moderate wealth effect and economic growth. We are already in the midst of low interest rates and should be throughout 2002. The moderate wealth effect is also already in play and will continue to improve along with the stock market, and economic growth has been forecasted which will create corporate profits and renewed job growth. These three items combined make up the trifecta and ensure a strong real estate economy. The local economy, like the rest of the nation, has been in somewhat of a holding pattern. Locally, we have been experiencing an economic correction following the burst of the “dot-com bubble”. The market has been somewhat of a depressant on those consumers whose stock wealth had helped finance a lot of spending during the late 1990s boom. One of the most pronounced impacts has been on the luxury housing market. We are now at the low ebb of the economic cycle which has caused an interruption of the normal business cycle, but things are looking up. Economists are predicting that the economy
will rebound by mid-year, experiencing increased job growth and economic
recovery. It won’t be the euphoric growth of the dot-com era, but things are
anticipated to improve. Think of the economy like a rose bush—to produce a
stronger, more flourishing rose bush you must severely trim back the branches.
In similar terms, many companies have been trimmed back, but this only creates a
strong platform for economic improvement and expansion. Low interest rates drove the real estate
market—and the economy—in 2001. And low rates will play an important role in
our economy again in 2002. We’ve experienced record housing sales in the more
affordable price ranges (affordable = homes priced at or below the median
housing price for a given area) and as the economy improves, we will see a
return to increased sales in the mid to upper-price ranges (homes priced above
the median price range). It’s important to understand that the
affordable housing market is interest rate driven and the high-end market is
driven by the wealth effect. As mentioned earlier, the wealth effect that
resulted from the dot-com boom had enormous impact on the luxury real estate
market. But when the tech industry took a dive, the wealth effect fell off, and
the high-end housing market subsequently slowed. As the wealth effect
strengthens, the high-end market will improve too because buyers will use some
of that wealth to buy homes. We are already beginning to see improvement in the
mid to high-end housing sales and it’s anticipated that as the economy
strengthens, buyers in these markets will return in greater numbers. There exists a very unique opportunity for buyers in the mid to upper-end housing market because of the trifecta. Over the last year premium priced housing came off the frenzy market pricing it had been experiencing during the dot-com boom, causing prices to adjust down. At the same time, affordable housing prices have continued to appreciate at a high rate because of the shortage of affordable homes near the job centers, making it advantageous for those home owners to sell. Thirdly, with such low interest rates, buyers can typically sell their current home and secure a loan for a more expensive home without experiencing a significant increase in their payments. Furthermore, as the economy strengthens the wealth effect (corporate profits and stock values) will improve and consumers will have more resources to purchase homes. All of these factors combined result in a very advantageous opportunity for those who want to move up in the housing market. We’ve probably seen the low of the low interest rate cycle. Economists anticipate that the Federal Reserve will slowly begin to raise interest rates as the economy improves. However, the hope is that rates will remain in the seven percentile or lower, which isn’t the historical lows we’ve seen in recent months, but still opportune. Locally, I believe that the affordable housing market will remain strong, as it has over the last year, and the trifecta will create sound opportunities for home ownership in the mid to upper price ranges, strengthening that sector of the market. Overall, I anticipate that 2002 will be another successful year for the residential real estate economy. |
