In real estate, never ignore the past

Prices are up in metro Atlanta, across the nation

This time last year, the big push was to get buyers off the fence, to try to convince them they would be better off buying in the summer of 2012 at 4 percent interest for a 30-year fixed-rate loan than sitting on the fence waiting for prices and interest rates to fall.

As it turns out, that was particularly good advice.

Interest rates have pretty much stayed the same since then, bouncing around just under and just above that 4 percent rate. But consumer confidence has grown since then, and much of metro Atlanta’s excess housing inventory has been either purchased or never hit the market.

Thus, we are now in a seller’s market.

As a result, prices are up about 15 percent since then, and the fence-sitters may have waited too long to get the house they want at a monthly payment they can afford.

Sellers have figured out that the metro Atlanta market is heating up, and they are getting more aggressive every day in both pricing and negotiating posture.

To make matters worse for all of us, Ben Bernanke and the Federal Reserve recently announced that the availability of artificially low interest rates, intended originally to stimulate the sluggish economy, may be gradually withdrawn starting in 2014.

That news conference threw the stock market into a tailspin, where equity investors are unable to contemplate business in the reality of the actual cost of capital for home loans.

The gradual reduction of asset purchases known as “quantitative easing” is referred to as “the taper,” and many in the financial sector believe it is likely to lead to higher interest rates for all borrowers, and specifically for home buyers.

Flash back to 1970, when the average home on a lot in America sold for about $25,000. A gallon of gas cost 36 cents, and the average new car was about $3,900.

Between 1970 and 2007, the average price of a home in America increased steadily about tenfold, to around $265,000.

The big question is: Can it happen again?

Some would have you believe that real estate prices are driven primarily by speculation and by greed. Others would say that government subsidy in the form of the ever-sacred mortgage interest deduction has, in the past, fueled home prices. There is no question that low interest rates make ownership more affordable.

But where does equity growth fit in today’s picture?

It’s pretty much a fact that, on average, if you bought a home in metro Atlanta, it’s worth about 15 percent more today that it was a year ago. That’s impressive. That’s equity growth.

And if that continues, I can guarantee that we will see a rebirth of buyers not wanting to miss out on the next great boom in housing prices.

Equity growth is an extremely powerful motivator for homebuyers, giving them confidence that they are not making a staggering financial mistake, and that, in fact, they may be making a wise investment.

And apparently, equity growth is back.

OK, go ahead and tell me I am way too optimistic. Tell me it’s people like me who fuel speculation on housing prices and artificially drive up appraisals. I can take it.

But I’ve been in this real estate market for four decades, and I’ve seen prices rise and prices fall. I told you last summer that prices had dropped below the cost of construction and such low prices were economically unsustainable. And I was right.

If the Federal Reserve follows through with its announced timeline of tapering off quantitative easing, I believe interest rates will continue to rise, and prices will follow, slowly at first, but continuously.

At some point, this nation will exit this stubborn economic malaise. When that happens, unemployment will fall. And you and I will look back at the summer of 2013 and say “I sure wish I had bought more real estate then.”

FINAL NOTE: If you own real estate in DeKalb, Fulton or Cobb counties, you still have time to appeal your property tax assessment for 2013, but you need to move quickly. Details and forms are on my website at Money99.com.

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John Adams is a broker, investor, and author. He answers real estate questions every Sunday at 3 p.m. on WGKA-am(920). He welcomes your comments at Money99.com, where you will find an expanded version of this column.

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