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SALT LAKE CITY — As consumers, we are taught to seek out bargains, discounts and good deals. Paying less is better, right? So why are we celebrating rising housing prices and continuing to hear it is a good time to buy? In his State of the Union address last week, President Obama talked about the housing sector and its recovery since the collapse in 2007. For many of us, what happened then and what is happening now is nebulous and can be hard to understand. But, in light of the collapse, we, as a nation, can celebrate our subsequent recovery and rising cost of homes.
Simply put, in 2006 and 2007 many banks and lenders were playing fast and loose with the mortgages they were dolling out. In order to close deals, they were promising payments from buyers without the due diligence of making the sure the buyers could actually pay. And sadly many couldn't. Foreclosures increased and the value of homes dropped dramatically.
- Mortgage bonds. The Federal Reserve purchased (and continues to purchase) mortgage bonds which created a ripple effect resulting in lower interest rates. By purchasing the bonds, the federal government made more credit available and at a reduced cost. Thus, the lower interest rates.
- Shadow inventory. After the collapse, the number of available homes to purchase due to the number of foreclosures could have been very high. Luckily, major investors have purchased a significant portion of the inventory to rent out until the housing market recovers completely and they can sell the homes at a profit. By purchasing these homes, it has kept the supply of homes low. We know when supply is low, demand is high. And high demand fuels the economy.
So, now, we have lower interest rates and high demand. But, still, how are these increasing prices good for buyers?
If there is one good thing about the drastic reduction in the cost of homes, it is that they became very affordable. Think back to the good deals conversation earlier. And although we are now seeing a solid recovery, including the increase in the cost of homes, we have a long way to go before they reach their pre-collapse prices, and even further before they become unaffordable. In fact, according to the S&P/Case-Shiller Home Price Index, the increase in home prices we have seen as of late only gets us a fraction of the way back to where they were prior to the financial crisis. That's why we refer to this as a "recovery," because we are in the process of getting back to where we once were. In the meantime, we are continuing to enjoy home prices and mortgages that are oftentimes less than the cost of renting.
In addition to being the roofs over our heads, our homes are investments for us. So think of it like buying a rare collector's item. As time goes on, you would hope your item increases in value so some day you could turn around and sell it for more than what you paid for it. Homes are the same way. For those who purchased their homes as the market was collapsing, their homes are now worth less than what they owe. For them, selling at this point would cost them money instead of make them money. However, for those buying homes today, the value of their home is increasing as home prices rise, making their home a productive investment.
Lastly, because so much of our economy hinges on the success of our housing market, to see it recover means good things for the rest of our economy. In fact, as President Obama said in his speech, home prices are not only rising, but rising faster than they have in six years. So for those of us to own homes, our investments are becoming more valuable. For those who are looking to buy, they can take advantage of low home prices, low interest rates and the ultimate joy: homeownership.
Dave Zitting is the President and Chief Executive Officer of Primary Residential Mortgage, Inc.