How Will Growth Be Affected in Our Region?

In this article from Lacey Rise of Forbes.com, she talks about the effect the slowing market will have on various groups from buyers, and sellers to investors and speculators. My favorite quote is where ever the party was the loudest that's where the hangover will be the worst...referring to the "hot" recent markets like Florida, Nevada and of course California.

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Get used to it--the seller's market is closing up shop. The days of fat, fast home value increases are gone. Pack away those flipping fantasies.

"The boom is definitely over, there's no debate about that," said Mark Zandi, chief economist of West Chester, Pa.-based research firm Moody's Economy.com. "Now the question is more how hard is it going to land, if it lands at all."

The answer? Depends who you ask--and what location you're talking about. How to feel about it? Depends which side of the market you're on--and what location you're talking about.

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Few, if any, economists are enthusiastic about current market conditions, thanks to a host of bleak figures recently released by home builders, federal agencies and the National Association of Realtors (NAR).

On Aug. 22, luxury home builder Toll Bros. announced that its net income fell 19% in the quarter ending July 31 from a year prior. Earlier in the month, the company said new orders had fallen 47%. According to NAR, the number of existing home sales plunged 4.1% in July to a seasonally adjusted annual rate of 6.3 million, the lowest since January 2004. Nationwide, the median sales price for an existing single-family home inched up a painfully small 0.9% compared to double-digits in 2005.

But that's just today's pain. What about six months from now? A year? Five years? Opinions about the future range from hopeful outlooks to doomsday predictions.

"One possibility is that you get a quick return to normal, which is what the economists for the realtor groups tend to hope for," said Edward Leamer, director of the UCLA Anderson Forecast. "But there's nothing in the historical record that suggests that we're going to get a return to normal anytime soon."

"It is a question of whether it is deep and quick or not so deep and much longer," Leamer added. His prediction: "Not so deep and rather long."

The way Zandi sees it, the market is going to weaken considerably more. "It has been correcting for about a year, and it's got another year to go," he said.

Not surprisingly, Lawrence Yun, a senior economist for NAR, is more optimistic. He claims that the market has returned to more earthly figures after a period of unsustainable growth. "Any decline will be very short-lived," he said. "By the spring of 2007, the market will begin to see increased sales and strengthening in home prices."

Others are less willing to prognosticate an end date for the slowdown, due to a host of unknowns, including future interest rates and job markets.

Whatever the future holds, the present doesn't look good. The number of unsold homes on the market rose another 3.2% in July to 3.9 million, a 13-year high, according to NAR. If the current selling rate held steady, it would take 7.3 months for all of those houses to move.

One reason for the holdup is a disconnect between buyers and sellers, said Anderson's Leamer.

Many property owners are reluctant to cut their prices. Unlike builders, who are so desperate to sell their properties that some are throwing in extras like upgraded countertops and one-week vacations, many sellers are willing to wait. Their logic is simple, Leamer explained: "A lot of owners figure, 'My idiot neighbor sold his home for $1 million, and I'm not taking a penny less.' "

On the other side of the equation are the buyers, equally strong-willed. Unwilling to fork over those sums in a wavering market, they are watching from the sidelines, waiting for prices to drop.

"Buyers are holding back currently to see how long and far this cooling will go," said NAR's Yun.

What's more, two key sources of housing demand are locked out of the market, explained Moody's Zandi. One is first-time home buyers, who can't afford to buy given the mix of rising interest rates and still-high home prices. The other is speculators, who can no longer benefit from dramatic appreciation by flipping real estate.

Of course, real estate is a highly fragmented market--what happens in Palm Beach, Fla., may be completely different from what is taking place in Cleveland or Phoenix. Not everyone benefited equally from the boom, and not everyone will suffer the same in a bust.

Areas that were once epicenters of the boom, like Phoenix, San Diego and Las Vegas, will be among the hardest hit, Leamer said. "Regions where a lot of the economic growth came directly from the real estate sector and where that was a huge plus, that's going to turn into a huge negative," he explained. "Wherever the party was the loudest, that's where the hangover is going to be the greatest."

To get a sense of how home prices will perform in various parts of the U.S., we turned to Moody's Economy.com for historic and predicted median home prices in 15 major metropolitan areas. We looked back ten years and forward another ten. The results show several cities, including Boston, New York and Washington, D.C., experiencing ups and downs (more precisely, downs and ups) in coming years--a boon for buyers, perhaps, but not for current owners. Other places, such as Houston and Minneapolis-St. Paul, may just keep chugging along.

The company bases its forecasts on an econometric model that looks at the relationship between prices and various factors that have historically driven supply and demand in these markets. The intricate formula was proved to work when compared with actual house-price performance through the early 1990s, a period when home prices rose and then fell sharply.

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