Sunday, September 24, 2006
How Will Growth Be Affected in Our Region?
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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.
Video: How Busted Is Housing?
In Pictures: How Low Real Estate Will Go In 15 Metro Areas
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.
Video: How Busted Is Housing?
Still Asking: Smooth or Crash?
While a slowdown in economic growth, contained inflation and a feather-pillow "soft landing" is what the Fed had in mind for the economy - history shows that economic "soft landings" are exceedingly rare, and that the Fed almost always hikes rates too far in their tightening cycles. Last week's news sure raised some eyebrows on this account - so let's take a closer look.
First the Producer Price Index - which shows if costs are increasing for those producing the goods we buy - came in showing costs had not increased last month, but actually decreased! Quite a surprise, although some of the decline was due to lower oil prices...but still good news, as producers have fewer reason to pass on higher costs to us consumers.
Next, the Fed for the second straight meeting, opted to stay in a "paused" position, and commented that while economic growth is moderating, some inflation risks remain. Fine - no real surprises there, as the Fed tends to not want to shock or upset the market via their prepared commentary. But then along came Friday's somewhat dramatic Philly Fed manufacturing report, showing a very major slowdown in the manufacturing sector. Many economists are wondering, "Did the steam leave the economy?" The cool financial news of the week helped Bond prices improve, and brought about .125% of improvement to home loan rates.
And now while a nice orderly slowdown that feels like a cool breeze is what the Fed desired with their string of seventeen rate hikes, concerns are now mounting about the severity of the slowdown. The Fed has had a history of always going too far, not being patient enough and sending the economy into recession. It will be interesting to see how things play out going forward, and next weeks reports will be especially important...