Investors:  Investors, yes, even flippers will continue to grow in numbers as they realize housing is the best risk-adjusted return on their money.

Boomerang buyers: Foreclosed homeowners, who are currently renting homes, will come back in droves. In Phoenix, they are paying $1,300 in rent for a home whose mortgage payment would be $1,000. That situation is not sustainable.   There are a number of low-down payment government insured programs (FHA, USDA, VA) available at rates below 4.0% at present. Those payments are still very affordable.

Entry-level buyers: First-time homeowners, who have been sitting on the sidelines waiting for a sign of the bottom, will hear about price increases in their desired neighborhood and rush to become homeowners.

Move-down buyers: Empty nesters and retirees, who have plenty of equity in their existing home, will buy a home that is more suitable to their current lifestyle, which may or may not include adult children as well as their aging parents.

Move-up buyers: The price appreciation that occurred in the last year has already lifted 1 million underwater homeowners above water, and future price appreciation will lift even more.

Don’t be surprised if home prices begin to appreciate rapidly. Why? The ratio of homeownership costs to income is at an all-time low, and people are not going to continue renting homes at a monthly cost that exceeds a mortgage payment.

In fact, home prices need to rise 38%, or mortgage rates need to rise to 7.9%, for us to get back to the normal ratio of homeownership costs to income.  It doesn’t matter how you define homeownership costs.  As long as you use a consistent definition, homeownership is cheap!

Assuming our leaders in DC come to some sort of agreement that keeps the economy growing and interest rates low, which seems like the most reasonable assumption, here is what will happen:  (See Insert above)

Don’t listen to the naysayers. They frequently make one or two negative points, many of which are valid, but they don’t understand the big picture.

The Big Picture is:

Housing is cheap

People prefer to own

Get ready for a surge in home prices!

Author: John Burns, John Burns Real Estate Consulting