I recently had the privilege of being interviewed for a USA TODAY article on Indianapolis real estate. I had to say this repeatedly to my interviewer so that she got it straight, but it is a great time to purchase real estate in Indianapolis. Perhaps better said, it's a great time to purchase the RIGHT real estate in Indianapolis. There truly is tremendous opportunity at this moment in our real estate market. That's the good news, with challenge always comes opportunity. Great locations and prime parcels of land will continue to appreciate in value. The decision making on what constitutes a great real estate choice will be more difficult but certainly still possible. Those that make good decisions will prosper. Those who don't will pay a price. There will be many winning and losing contrasts that play out in our real estate market in the months to come. The only question is which side will the decision makers be on? There are some specific factors at work that will influence our values in the near future.
In Indianapolis, we have built over 80,000 new homes since 2000. There is simply no way that with our population base and slow growth, we could absorb those types of increased supply without consequence. However by itself, supply is not the sole reason for our challenging market. There are other things at issue.
Indiana continues to have one of the highest foreclosure rates in the country which has enormous ripple effects in many neighborhoods. A foreclosed home in any neighborhood will eventually sell at below market costs in most situations. Add a 25% reduction in a price per square foot sale to a neighborhood and watch how potential home buyers react in this type of slow market. They will either not purchase at all from that concern or assume that any other home values must reflect a reduction in price because of the foreclosure. Add five foreclosures to a neighborhood and watch how the values are affected. Add five foreclosures to a given price point in any one township and watch how those same values are affected. Then the influence starts up the price pyramid. If the values of $150,000 home fall, those buyers will have more difficulty purchasing a move up home at $275,000. The $275K sellers who hope to be buyers at $425,000 now are more conservative, if they are still in the market at all, and so on up the food chain.
Many people have taken advantage of the historically low rates over the past few years but that may end up working against more buyers being in the market for a move up home. If you are in a home with an interest rate of 5.25%, you're going to have difficulty swallowing another $100,000+ in mortgage along with a rate increase into the low 6% range. Many people who are considering moving will think long and hard about raising their monthly by 50, 75 or 100%.
Finally there is the sub prime lending problem that could become a tsunami in the real estate market. Last year, many lenders loosened their credit standards on prime loans with the lowest interest rates as they competed for a shrinking pool of borrowers. Wide spread defaults in the 6 trillion dollar mortgage backed securities market could have a major impact on the U.S. economy and subsequently the already difficult real estate market. This is stay-tuned issue that will play out as the summer progresses.
So where does this all leave us? As I said at the outset, this a time when life changing opportunities are available in purchasing real estate. By making the right decision, there will be those that enjoy incredible equity growth from the challenges upon the market at this point. There will also be those that believe they are capable of making those decisions with a minimum of assistance. I would urge caution. There are going to be many developers, builders and very smart private individuals who think they know.....but don't. In closing over $200 million in real estate sales in the last three years, we see that happen every day. If you're going to be in the real estate decision process, get the best help you can whether that's raw information or someone who represents you. It will be essential to your long term prospects.
"It's not the strongest of the species that survives, nor the most intelligent but those most responsive to change."
-- Darwin
