Given the current state of affairs in the national economy and the current conditions in the local real estate market , could this be a perfect opportunity to buy a house or move up to a larger house in Loudoun County?
If you are a contrarian, then the answer is almost certainly YES. If you look at market factors that were in force at the top of the market place in the summer of 2005 and flip them upside down, you get the same answer, YES. And if you look at business cycles and the typical length of a bear market, once again you get the same answer, YES.
Analysis #1 - The Contrarian
In this marketplace with every story coming out being doom and gloom regarding home sales, home prices, unemployment, banks getting seized, investment companies going bankrupt, foreclosures hitting all time highs, recessions, bailouts, budget shortfalls, emergency sessions of Congress, Presidential speeches, etc. etc., it is almost impossible to go against all other indicators and predict a bottom to a market. But if you are a contrarian, these are the perfect indicators that you look for to predict a bottom to a market. Or at least they give you reason to look for a turning point to the current downward trend.
Looking back at the state of the economy and what was in the news regarding the economy during the summer of 2005 shows almost nothing negative in the archives except the war in Iraq. The main concern of the President was Social Security. Here is what the President was doing those months. The very last entry for the month of August was, in all likelihood, the catalyst for the downfall of the economy. It was the outline for the relief efforts in the aftermath of Hurricane Katrina.
Analysis #2 - Local Real Estate Market Factors
The net increase to inventory levels during the summer months (Jun-Aug) of 2005 was 760 homes. This was on top of an increase of 494 the previous three months. At the time, that increase to inventory had not been seen since the 1990's. Compare those numbers to the net decrease in inventory numbers of 633 for the summer months after a decrease of 20 the previous three months.
The average price of a home sold in the summer of 2005 in Loudoun County was $544,425. Compare that to the current price of $380,863 and you have a prices that are 30% better than during the height of the market when everyone was fighting to buy a house.
And interest rates during the summer of 2005 were at 5.8% on a 30 year fixed rate mortgage. Compare that to today's interest rate on a 30 year fixed mortgage rate of 5.875 - 6% and there is very little difference to a mortgage payment. Payment of the average home today at 6% is $900 a month less than the average payment of home purchased at 5.75% in 2005. You would need an interest rate of 3% to get to the same monthly payment.
Analysis #3 - Market Cycle
How long will the market go down? There are many schools of thought regarding the length of a market cycle and none are the same but if we look at the most recent real estate market cycle in this country we can get some idea. From peak to peak, the national real estate market cycle lasted about 16-17 years (1989-2006). Given the same length of contraction, consolidation and expansion of the previous cycle, we should see a contraction of 3 years that offsets the boom of 4 years that occured between 2002 and 2005. That should be followed by a consolidation period of normal or little growth during a 8-10 year consolidation period.
Here in Loudoun County we are usually about 6 months to a year ahead of the national averages therefore you see the peak as 2006 on a national level while we were peaking in 2005. And because of that fact Loudoun County will come out of this down cycle before other markets in America.
