As we wave goodbye to 2006 and welcome in 2007, many people are turning their attention towards real estate. The spring market is looming – the big question is, what type of market will it be? 2006 is no longer new news for anyone. We hit a market downturn after 5 years of hot growth, it was bound to happen. But more important is how long will the downturn last? This factor is vital for anyone thinking of putting their home up for sale in 2007.

This fall, we saw prices drop anywhere from 2-5% in our market in the months of August and September. During the last three months of 2006, prices continued to drop to a low of 5-10% off of their late-2005 values. This isn’t a figure that homeowners are thrilled about. But compared to some other parts of the country that saw up to a 50% drop, the Midwest market faired pretty well.

This fall, there were two trends that were apparent: 1. homes had to be priced competitively and in top condition to sell and 2. buyers tended to be very choosy and spent time shopping around. This second trend contributed to the longer-than-usual market times of many homes. It wasn’t unusual for some well-priced homes to be on the market several months before selling.
There were several main factors that contributed to the market conditions we all experienced in 2006. First, many feel that the Federal Reserve (Fed) was too aggressive with interest rate hikes. Often, changes in the interest rates take a while to reverberate throughout the economy. Instead of letting the market react to small interest rate changes, the Fed pursued an aggressive series of hikes going from a 1% overnight rate in 2004 to a high of 5.25% in June.

Two other factors that most likely impacted fall home sales were the elections and current world events. The general feeling was that a lot of buyers were holding their breath this fall. Elections traditionally put a bit of a damper on our markets and this year was no exception. Combine this with some national uncertainty about world conflicts and big issues such as immigration and buyers likely felt uneasy about making a major real estate purchase in 2006.

Finally, the media was largely responsible for a good deal of buyer uncertainty in 2006. For years, every pundit and talking-head out there had been predicting a market crash and for the past 5 years or so, the market held strong. Then, the Fed started raising the rates and things started to cool. Of course, everyone with a voice started piling on the idea of a market bubble. Unfortunately what happened was “Chicken Little Syndrome” – suddenly everyone thought the sky was falling and the market began its downturn all while interest rates stayed reasonable and housing prices good.
The result was 2006. The next question is obvious: what’s next? Here’s where we have some good news. The general feeling among the true real estate experts – me and my fellow REALTORS who are out in the field in your local market day after day working – is that 2007 will be the end of the downturn. The next big event on the horizon is the end of the winter market and we should start to pick up steam heading into spring. Actually many REALTORS are predicting a hotter-than-normal spring in 2007 that should end the downturn, signal a soft landing and return us to balanced growth in our local real estate market.

The biggest factor that should influence the market this spring is the leveling off of interest rates. Actually rates began to dip in the last few months of the year. If the Fed holds steady going into spring, buyers should take it as a sign that the market is leveling out. Combine this with the fact that many buyers most likely held out towards the end of 2006 and we’re looking at a larger-than-normal pool of buyers that should commit to a purchase this spring.

Also, consider the fact that we are still sitting on a large inventory of unsold homes, some of which are priced very attractively. Basically we have a convergence of a large pool of eager buyers and a large pool of unsold homes at great prices – the outcome should be a lot of activity this spring. So, how should all of this affect buyers, sellers and homeowners? If you are a homeowner, 2007 should return us to a steady rate of appreciation. It probably won’t be as great as from 2002-2005, but a 3-5% per year rate shouldn’t be out of the question. Sellers should be particularly interested in a rebound this spring. What was a very difficult and trying 2006 market should turn into a great time to put the home on the market. The most important thing for sellers to understand is that the inventory of unsold homes on the market should still be high this spring but buyers should be buying. This points to several factors: sellers need to make sure their homes stand out of the crowd both in condition and price. If this is done correctly and your REALTOR works hard at marketing your home, its time on market should be greatly reduced from 2006 levels.

Buyers should see the rebound as a last call of sorts. If you’ve held off buying for whatever reason, it’s time to commit to a purchase. In fact, buyers should really consider making a purchase in the next month or two in order to gain full advantage of the 2006 market conditions before they level out. Those that wait until summer or fall might miss the current buyer’s market and find more competition and higher prices. Another benefit to buying in the short term is that interest rates are still relatively low and there are some great programs out there for buyers. While we all expect the Fed to hold steady with rates, we don’t expect them to drop anytime soon. So the current rates might represent the lowest they’ll be for the foreseeable future. A great market for any buyer in the forseeable 2006 and 2007.

2006 will go into the books as one of the most difficult years for real estate in the past decade. Looking forward to 2007, we can expect the market to level out to a sustainable pace. Whatever your real estate plans are in the coming year, it will be important to keep track of current market conditions. If buying or selling is in your near future, it’s important that you seek professional assistance to help you make the decisions that will benefit you the most. Contact me at 630-346-1041 to schedule an appointment.