The dizzying rise and sudden slump in the housing market has left homeowners concerned about how to make reasonable financial plans for the future - not knowing what their house will be worth. Consumers will most likely not lay out more money to buy a property that they could rent for the same price, unless they are going to make a profit selling in the future. According to FORTUNE’s calculations, prices in most markets will fall by double digits over the next five years. This disturbing conclusion was reached by comparing the median price of existing homes in 54 metropolitan areas to the annual rent on similar properties. Economy.com compared the Price/Rent ratio for each area and compared it with the average over the past 15 years, and then calculated how much it would have to decline to return to its historical norm. The average drop for all 54 markets surveyed was 28% - this coupled with the 12% rise in the markets over the next five years, prices only need to drop about 16%. The big price declines are inevitable due to the giant chasm that opened between prices and rents, and how fast it happened. The 40-year low interest rates that prevailed from 2003-2005, brought a flood of investors into the market. Lax lending standards allowed sub-prime borrowers, people with poor credit histories, and erratic employment records, to suddenly afford to buy houses, further stoking the demand. Houses were still being built to the demand of investors, which have since disappeared. Resulting in the housing industry facing an enormous amount of houses unsold, and unoccupied. The cheap and easy money is gone, but the inflated prices it created are still here. Many of the new vacant homes for sale are in the hands of builders, older homes that speculators are trying to dump, and foreclosed properties that banks are desperate to shed. The prices will keep falling until the builders work off their massive inventories.
Tully, Shawn. “How Low Can They Go?” FORTUNE Nov 12, 2007.
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Alpha Omega’s Opinion:
So what does this mean for small business owners, those of us with annual revenues of approximately $50 million or less, who may want to exit from their businesses? Although the earnings of any business remotely tied to new home construction markets will plummet, the remainder of the economy, albeit slower to grow, should not be impacted directly. Lower earnings certainly will reduce valuation levels but may not directly impact the resale demand for “larger” small businesses (those with annual revenues from $5-50 million and with EBITDA of $1 million or greater. The demand for these businesses from the private equity buyer segment will actually increase as larger deals become more difficult to find and close due to increases in leading rates and tightening of lending covenants.
Anthony Vincent