Last week I attended a real estate conference where the keynote speaker reviewed the national real estate market. Traditionally, real estate has appreciated about 4% per year over the last 50 years. Based on that trajectory, the median price for a home should have been $219,000 in 2011, but the price was $166,000. That means real estate is undervalued right now. Statistically, there is only a 5% chance prices will go down further.
Currently, our market is experiencing record low interest rates. The Federal Funds rate is at zero. It can’t go any lower. We are at the bottom of interest rates (see my previous blog).
According to our speaker, the luxury market is rebounding. This is because the world’s richest people are expanding their wealth. Five percent of all people in the world account for 37% of consumer spending. The world’s wealthiest people invest approximately 19% of their portfolio in real estate. International buyers are making up a more significant portion of the luxury market. Wealthy people from China, Brazil, Russia, Canada and India are looking for a stable currency and stable economy to park their investment dollars. Some of these individuals are also looking to the US as a safe place to raise their families.
Similar to the stock market, real estate prices are based on “perception”. Currently, the interest rates are at record lows, property is undervalued and yet because of unemployment and perceived instability in our economy, buyers hesitate to pull the trigger. Perhaps we should look to the luxury market and note that the world’s wealthiest individuals are currently BUYING real estate.