The Future For Home Prices

Home prices in some areas of the country have declined by as much as 35 percent, but most housing industry experts agree that the long-term trend of home price appreciation will continue.

MAKING SENSE OF THE STORY

· According to several recent surveys, the majority of American homeowners believe that real estate still provides the best opportunity for increasing their wealth and net worth, and that home prices will rebound. However, most housing experts predict that home prices will not reach bottom until at least the second half of 2009.

· Historically, home prices tend to increase on average at an inflation-adjusted rate of 2.5 to 3 percent each year. Karl Case, co-creator of the S&P Case-Shiller home-prices indices, believes the same long-run pattern will continue, despite recent events in the market. Others speculate home prices will increase at a rate roughly 1 percentage point higher than inflation or at an average of 4 percent a year over the next two decades.

· Home prices often are driven by immigration, birth rates, the size and nature of households, and incomes – all of which are difficult to predict. Forecasting where jobs and income growth will be stronger and where immigrants and others will want to live is key. Areas with lower housing costs, modern industries, leisure businesses, well-diversified regional economies, mild climates, and other attractions likely will attract future homeowners and drive demand for housing.

· Coastal areas tend to be more volatile, and often have home prices that rise and fall much faster during booms and busts than do inland areas. Land shortages and building restrictions, which often are the case in crowded coastal areas, make it difficult for builders to respond quickly to sudden rises in housing demand. Inland areas tend to provide more vacant land, enabling builders to meet housing demands more quickly, minimizing sudden movements in prices.

· Some housing experts believe that baby boomers will be much less likely to settle in traditional retirement areas, such as Fort Lauderdale , Fla. , after they retire and may prefer urban settings with cultural activities, friends, and family in close proximity. This could increase the housing demand and drive up home prices in urban neighborhoods. Additionally, the retirement of baby boomers over the next two decades – approximately 78 million boomers – may depress home prices in some areas, as more boomers sell their homes.

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