What Locomotive Will Pull The Train in 2015?

The world is built in such a way that when the sun shines in one place, it is dark in another. Complicated. This contrasted picture could illustrate the volatile and moody nature of the US real estate market. Look at the so-called recovery that we have been writing about for 4 years already, even though it has not been exactly obvious. Did we all feel it? Did all regions feel it? Of course not! Who benefited from it? Who will benefit from it going forward, while it lasts?

As if it was not difficult enough, in any business, to deal with cycles, we have to recognize that a wave of real estate activity (number of sales or price appreciation for example) is rarely generalized all over the country and rarely affects all price ranges. Again, the sun does not shine everywhere at the same time. The Big Mo is very picky. People’s means, needs & motivations regulate the game and they too keep on changing.

When home prices resume their growth on the two coasts after a crisis, the rest of the country may still be stuck in paralysis and see prices continue falling. Or the other way around. Same phenomenon among the various segments of the real estate price ladder. When the high-end is hot and steamy with cash deals and foreigners over-bidding one another, the low-end may be cold when the buying pool is mostly composed of investors…. Or when the low-end comes alive again and prices surge, high-end prices may be soft and challenged.

Every 2 to 4 years or so, depending on the length of cycles, we pretty much can count on one price segment of the real estate market serving as a locomotive. That segment is almost always different from one cycle to the next, as it follows the state of the economy and the means as well as the profile of the buyers, wherever they come from.

More often than not, the high-end acts as the locomotive. The first (and often the biggest) price surge usually takes place at the top of the market, and the appreciation wave eventually moves through the various price layers. That’s what happened in the late 90’s, in 2004, 2005 &2006, and again, to a lesser extent in late 2010, 2011 and the beginning of 2012.

Big difference during the recent crisis, mostly from 2008 to 2010. The market stayed alive “thanks” to a tsunami of transactions at the low end or located in the regions most affected by the recession. Short sales and other distressed transactions represented a huge and growing share of the activity, until the economy turned around and equity sales came roaring back.

What happened in 2012, 2013 and 2014? What happened is that we saw the “bread & butter” (around median price) and the first tier of the high-end market (roughly from $1M to $3M) go wild, with double-digit price hikes. The move-up market was booming again, as jobs, incomes and confidence were growing.

Of course, the luxury market was alive and even prospered during all these years, from 2010 on. However, only the very top of the price ladder saw a significant price surge. When they see exceptional quality, those people who can afford it are fast to write an offer, without questioning the price. Case in point, Atherton, the most expensive town in the Silicon Valley (and in all of the US for that matter), saw its average sales price jumps more than 37% last year! No further comments.

OK, we are now 3 weeks deep into the new year; what price segment of the market is likely to pull the real estate train this year? My take is that the low-end is going to be the main engine. For one thing, First-Time buyers are expected to re-enter the dance. The record-low mortgage rates will obviously play a role but, more importantly, the overall cost of borrowing and new credit perks (like lower mortgage insurance premium with only 3.5% down on an FHA-backed loan) will greatly increase affordability.

There is more. Timing is everything. Look at the present conditions: more jobs, more job security, better pay, more borrowing money available, more confidence, price stabilization… Hard to pass on these opportunities if you want to buy a home and you can do it.

Now, where in the land can we expect a vibrant market? Most everywhere, but particularly where the economic recovery has, thus far, been late for the celebration. According to many analysts, the Midwest will be the bright spot in 2015. The Midwest low-tier should outperform all other price segments and all other regional markets, with a growth (6/7%) about double what is expected elsewhere. If you happen to be there and ready to make a move, don’t miss your turn!