Where Will the Bottom Be?

Given the ongoing turmoil in the housing and financial markets, many people who want to buy homes are sitting on the fence, either waiting for the market to bottom out or fearing that it never will.

So what is the chance that the market will continue to decline, prices will continue to drop and a home purchased today will be worth less a year from now? Of course, no one can know for sure what will happen a month, six months or a year from now. Housing is predictably cyclical, but the current housing slump has already lasted longer than previous downturns. Moreover, timing the market is a strategy that rarely works; by the time it’s clear that a market has turned around, it’s too late to take the best advantage of the conditions at the bottom.

It’s also important to remember that home prices have not declined equally in all areas of the country. All housing markets are local, and all perform differently. Yes, some markets in Florida, Texas and California have seen significant declines, but for the most part they are the markets that had the largest increases during the recent housing boom.

In the Capital Region, stability has been a way of life. The large housing price increases and speculative buying so evident elsewhere never reached the area. Because of this, housing prices and values have not declined to any significant extent. Looking forward, the Capital Region remains positioned for growth with expanding employment and development. This will create future upward pressure on home prices.

When considering new construction in a relatively balanced market such as the Capital Region, a related issue is replacement value. When new home prices near their replacement value (the cost to build an identical model), they are not likely to go any lower. It’s simple arithmetic. If a builder cannot sell a house for as much as it cost to construct it, he won’t build any more houses. Ultimately, prices will increase as inventory declines and demand increases due to growth of new households.