Low mortgage interest rates have fueled the rise of home sales. Despite rising interest rates and pronouncements that that this bubble will burst, the real estate market, while becoming more 'balanced', has remained strong. What is often overlooked is an important factor driving the economy: demographics.
Dr. David Lereah is a best-selling author and the Chief Economist for the National Association of REALTORS® (NAR). In a recent interview, Dr. Lereah revealed, "The biggest factor that affects real estate today, and has made it immune to some cyclical changes in the economy, has been demographics."
The most significant of those demographics are:
The "Baby Boom" Generation - This generation (refering to children born in the years following World War II) is the largest so far, and their impact has been felt across the nation. Now that Baby Boomers have reached their peak earning years, they are purchasing larger primary residences as well as vacation homes and investment properties. The statistics for 2004 reflect this trend, with 36% of all home sales going toward second homes.
Immigration - There has been a large influx of immigrants over the past three decades. According to Lereah, it typically takes at least a generation for immigrants to become fully active in the home buying market.
Children of Baby Boomers - This generation, the second largest ever, is now in their twenties and looking to purchase their first homes.
Retirees Living Longer - While the demand for housing is expanding, the supply is decreasing. With advancements in medicine and treatments of diseases, retirees are living longer. This means that they are occupying their homes for more years, which decreases the supply of homes available for purchase.
So if the current market can be explained primarily by the factors we just discussed, how do we know whether the Real Estate housing market will continue to thrive?
Dr. Lereah says, "We are in the Golden Age of Real Estate." Even if the economy should slow and interest rates increase slightly in the coming years, the demand for houses is still strong. The biggest impact that such a change would have is to decrease the rate of price appreciation. The media likes to refer to the real estate boom in terms of bubbles and balloons.
In keeping with that analogy, Lereah indicates that local markets may react to higher interest rates by letting some air out of the balloon. The double digit price appreciation we've experienced may decrease over the next year or two to a more typical 4-6% range. This is still a higher rate of return than found in the stock market, all things considered.
Source: LoanGal.com editorial, Heidi Rivas
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