Is Now the Time to Invest in Real Estate?

Stock Market Floor

The financial meltdown that started in 2008 was largely triggered by banks' exposure to low-quality subprime mortgages in the US. This led to a cascade of events where ultimately banks lost faith in each other – leading to a liquidity crisis. The end result was that banks and insurance companies did not have access to the capital they needed, and they started to fall like dominoes. The Lehman Brothers collapse and the federal government's unwillingness to bail them out resulted in a complete loss of confidence, and the contagion spread around the world.

In the wake of this unprecedented financial gridlock, both stock market and real estate prices plummeted. For example, in 2008, the Dow was down over 30%, the S&P 500 was down over 35%, and the NASDAQ plummeted an astounding 37%. Real estate markets that had been booming previously also fell precipitously – house prices in Phoenix fell 33%, those in Las Vegas fell 32%, and San Francisco saw a decline of 31% in the same year.

It has taken a long time, but the US economy finally seems to be shaking off the impact of the global financial crisis. GDP growth, while still anemic by historical standards, is above 2% again, the Dow was up nearly 10% in 2012, and has accelerated further coming into 2013. The S&P 500 and NASDAQ fared even better in 2012, rising over 16% and 18% respectively.

Under Construction House

Now it seems that real estate is also turning the corner, and it may be the time for wary investors to think about reentering that market. According to the National Association of Realtors (NAR), the median price of a single family home in the US rose 11.3% nationally in Q1 2013 compared to a year earlier, with 133 of the 150 markets it tracks reporting price increases. For example, prices in Silicon Valley rose 31.7%, perhaps encouraged by the continued presence of angel investors such as Steve Spinner (see Steve Spinner's VisualCV) into the high-tech market. Other notable metropolitan areas that saw tremendous growth include Akron (32.6%), Reno (32.1%), Atlanta (31.1%) and Phoenix (30.1%).

Of course, it is important that you pick the markets that you want to invest in. Ideally, you need to identify those markets which are about to take off, but haven't done so yet, in order to maximize your potential returns. The underlying dynamics in some markets are also against real estate price increases, with some actually continuing to decline – such as Edison, NJ, which saw an 8.6% decline, and Bethlehem, PA, where prices slid by 8.3%. It is also worth checking which types of residential properties are rising the fastest in any area that you do look at, since homes in different price categories can rise at different rates.

The good news is that the trend may be set to continue. Another study carried out by NAR at the same time showed that buyers still found homes relatively affordable despite the price increases – in part due to continued low mortgage interest rates.

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