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.
Click on the title or here for a link to the full article
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?
Sunday, September 24, 2006
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...
Thursday, August 24, 2006
Soft Landing or Crash?
Jessica Holzer of Forbes asks whether the red hot real estate market is heading for a crash. In general she says it seems to be heading for a soft (rather than crash) landing. Here is an excerpt from her article. For a full view of the article click on this blog title (or here).
Pessimists argue that a housing bust will dampen consumer spirits and spending power, raising the risk of recession.
There are several reasons to reject this gloomy view. For starters, the economy is in good shape to absorb a slump in housing. Businesses are spending briskly on capital goods, and exports are strong. Despite the U.S. Federal Reserve's recent rate-tightening, interest rates remain low by historical standards. In short, as housing cools, other booming sectors are likely to offset the effects of the slowdown.
"The economy's a lot more dynamic that people make it out to be," says Mark Vitner, a senior economist at Wachovia Securities in Charlotte.
There is also an upside to a slowdown in the housing market: It will make it far easier for the Fed to rein in rising inflation without further rate hikes, argues Steven Wieting, the leading economist for U.S. equities at Citigroup.
And unlike the tech bust of the late 1990s, which caught investors and business off-guard, a slump in housing has long been predicted.
"It's the channel in which you should expect the slowing in the economy to take place," Wieting says.
In any case, the housing market isn't in the dire straits that it might seem. While overheated markets on the coasts are cooling, home sales are picking up in places like Texas, Georgia and North Carolina. Meanwhile, investment is pouring into non-residential construction, which will help mitigate the slowdown in housing by soaking up workers in construction, architecture and other fields.
So far, consumer spending is holding up. "It is decelerating, but it's not falling out of bed," says Nariman Behravesh, the chief economist at Global Insight, an economic forecasting firm in Lexington, Mass.
Partly, this is because households have accumulated wealth that will support their spending as equity withdrawals slow. According to the Federal Reserve, household net worth excluding housing wealth or liabilities ballooned by $3.5 trillion in the past year.
"The consumer balance sheet is big and getting bigger in both directions, with both assets and liabilities going up," Wieting says.
Pessimists argue that a housing bust will dampen consumer spirits and spending power, raising the risk of recession.
There are several reasons to reject this gloomy view. For starters, the economy is in good shape to absorb a slump in housing. Businesses are spending briskly on capital goods, and exports are strong. Despite the U.S. Federal Reserve's recent rate-tightening, interest rates remain low by historical standards. In short, as housing cools, other booming sectors are likely to offset the effects of the slowdown.
"The economy's a lot more dynamic that people make it out to be," says Mark Vitner, a senior economist at Wachovia Securities in Charlotte.
There is also an upside to a slowdown in the housing market: It will make it far easier for the Fed to rein in rising inflation without further rate hikes, argues Steven Wieting, the leading economist for U.S. equities at Citigroup.
And unlike the tech bust of the late 1990s, which caught investors and business off-guard, a slump in housing has long been predicted.
"It's the channel in which you should expect the slowing in the economy to take place," Wieting says.
In any case, the housing market isn't in the dire straits that it might seem. While overheated markets on the coasts are cooling, home sales are picking up in places like Texas, Georgia and North Carolina. Meanwhile, investment is pouring into non-residential construction, which will help mitigate the slowdown in housing by soaking up workers in construction, architecture and other fields.
So far, consumer spending is holding up. "It is decelerating, but it's not falling out of bed," says Nariman Behravesh, the chief economist at Global Insight, an economic forecasting firm in Lexington, Mass.
Partly, this is because households have accumulated wealth that will support their spending as equity withdrawals slow. According to the Federal Reserve, household net worth excluding housing wealth or liabilities ballooned by $3.5 trillion in the past year.
"The consumer balance sheet is big and getting bigger in both directions, with both assets and liabilities going up," Wieting says.
No Buyers in this Buyers Market?
August 24, 2006
Ironically, I have not had a better month in terms of getting buyer clients in a while, but the general news is that the buyers are not taking advantage of the pricing and homes available in the Chicago region. Rates are low. Lots of homes to choose from makes this a great time to buy as long as you are planning on staying in the home for a minimum of two to three years.
Here is an AP article on the latest housing news for Chicago:
House hunters shied away from buying in July, driving down sales of previously owned homes to a 2-1/2-year low. The inventory of unsold homes climbed to a record high.
The new figures, released Wednesday, provided fresh evidence of how much the once-sizzling housing market has cooled.
Existing-home sales dropped 4.1 percent in July from the previous month to a seasonally adjusted annual rate of 6.33 million units, the National Association of Realtors reported. That was the lowest level since January 2004.
Sales were weaker than expected, with economists forecasting 6.55 million units.
Investors, believing that housing sales might be dropping more rapidly than anticipated, sent stocks down for a third straight session. The Dow Jones industrial average lost 41.94, or 0.37 percent, closing at 11,297.90. The Standard & Poor's 500 index fell 5.83, or 0.45 percent, to 1,292.99, and the Nasdaq composite index dropped 15.36, or 0.71 percent, to 2,134.66.
The data comes after a Federal Reserve official hinted Tuesday that higher interest rates may still be needed to tame inflation, a move that could curtail consumer spending. Retailers and home builders, which have the most exposure to consumers, led major indexes lower.
''The focus now is on housing as the market shifts away from inflation and toward growth,'' said John Caldwell, chief investment strategist for McDonald Investments. ''The question is has the Fed done too much, and is housing going to lead us down.''
Although sales prices for homes are no longer bounding ahead, some prospective buyers are still waiting for better deals -- another factor in the weak showing, economists said.
''Many potential home buyers have been on the sidelines, some kicking the tires but mostly waiting for sellers to compromise on prices and terms,'' said David Lereah, the NAR's chief economist.
The median nationwide price of a home sold last month was $230,000, up just 0.9 percent from the same month last year. The median price is the middle point, where half sell for more and half sell for less.
Meanwhile, the inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of homes since the spring of 1993.
The Illinois Association of Realtors said July home sales were down 11.7 percent to 15,973 homes sold, compared to 18,089 sales in July 2005. The state's median home sale price in July was $214,000, up 2.4 percent from a year earlier.
AP
Ironically, I have not had a better month in terms of getting buyer clients in a while, but the general news is that the buyers are not taking advantage of the pricing and homes available in the Chicago region. Rates are low. Lots of homes to choose from makes this a great time to buy as long as you are planning on staying in the home for a minimum of two to three years.
Here is an AP article on the latest housing news for Chicago:
House hunters shied away from buying in July, driving down sales of previously owned homes to a 2-1/2-year low. The inventory of unsold homes climbed to a record high.
The new figures, released Wednesday, provided fresh evidence of how much the once-sizzling housing market has cooled.
Existing-home sales dropped 4.1 percent in July from the previous month to a seasonally adjusted annual rate of 6.33 million units, the National Association of Realtors reported. That was the lowest level since January 2004.
Sales were weaker than expected, with economists forecasting 6.55 million units.
Investors, believing that housing sales might be dropping more rapidly than anticipated, sent stocks down for a third straight session. The Dow Jones industrial average lost 41.94, or 0.37 percent, closing at 11,297.90. The Standard & Poor's 500 index fell 5.83, or 0.45 percent, to 1,292.99, and the Nasdaq composite index dropped 15.36, or 0.71 percent, to 2,134.66.
The data comes after a Federal Reserve official hinted Tuesday that higher interest rates may still be needed to tame inflation, a move that could curtail consumer spending. Retailers and home builders, which have the most exposure to consumers, led major indexes lower.
''The focus now is on housing as the market shifts away from inflation and toward growth,'' said John Caldwell, chief investment strategist for McDonald Investments. ''The question is has the Fed done too much, and is housing going to lead us down.''
Although sales prices for homes are no longer bounding ahead, some prospective buyers are still waiting for better deals -- another factor in the weak showing, economists said.
''Many potential home buyers have been on the sidelines, some kicking the tires but mostly waiting for sellers to compromise on prices and terms,'' said David Lereah, the NAR's chief economist.
The median nationwide price of a home sold last month was $230,000, up just 0.9 percent from the same month last year. The median price is the middle point, where half sell for more and half sell for less.
Meanwhile, the inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of homes since the spring of 1993.
The Illinois Association of Realtors said July home sales were down 11.7 percent to 15,973 homes sold, compared to 18,089 sales in July 2005. The state's median home sale price in July was $214,000, up 2.4 percent from a year earlier.
AP
Sunday, August 13, 2006
Our One Year Blog-iversary
A short post to celebrate our one year of our Chicago HomeBUZZ blog and posting real estate information is here! Let me know how we can make the site better. Feedback is always welcome.
Thanks to our loyal subscribers.
Jim
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