2008 real estate market predictions

East Bay Real Estate Crisis Is Over!

The Wall Street Journal article from May 6 is the most well thoughout explanation on the status of the current housing market.

By CYRIL MOULLE-BERTEAUX –
May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they’ve been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one’s income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today’s house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets’ perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to sub-trend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now. I realize that many of you may have opinions about how the real estate markets are impacting you personally and I welcome your comments. Until next time…

2008 real estate market predictions

East Bay Real Estate Agents Head To Atlanta Today!

North American real estate conference and idea sharing is this week.

One of the country’s largest real estate idea sharing conference is this week in Atlanta, Georgia. Keller Williams Realty calls it their “Family Reunion”. There will be thousands of Realtors participating in education sessions, business and marketing networking, and their 2007 annual awards celebration. Of all the conferences I attend each year for continuing education, this is the one that is jam-packed with the latest internet and business tools for Realtors. (Keller Williams Realty is currently the fourth largest and fastest growing real estate company in North America.)

In addition, there will be a separate session for Realtors who are focused on the luxury real estate markets and those focused on the international real estate opportunities being fueled by the “Baby Boomer” explosion into second and third residences. (Fractional deeded ownership is the hot product in this category of residences.) The luxury and international real estate markets are almost all marketed through the internet. It has been unbelievable to see the results that have been created by those Realtors committed to internet marketing and blog sites for these niche real estate markets.

(Again, if you have read some of my latest blog postings you understand that the current mortgage meltdown is not affecting the luxury or international real estate sales. These two markets are not concerned about mortgage rates or down payments. They have the cash and the connections for any mortgages that may be required to purchase these two categories of real estate sales.)

Gary Keller, co-founder of Keller Williams Realty, will be giving his annual address regarding the national market predications for 2008. After his address there will be a question and answer period for the media to clarify any questions they have with his predictions. (Remember, real estate is always a local business with local trends. The national trends do not connect to each of the local markets in America. The national trends are a summary of the local trends.)

Seth Godin, New York times best selling author is the keynote speaker at the conference. His latest book, The Dip, is #5 on the New York Times best seller list, and focuses on what you can do to power through tough times and low points, and how superstars set themselves apart from the pack by escaping dead ends quickly, while staying focused and motivated when it really counts. Godin has changed the way people think about marketing, change and work. His irrepressible speaking style and no-holds-barred blog have helped him create a large following around the world.

Also, as part of the Family Reunion in Atlanta this week there will be acknowledgements of Realtors in the United States who have given back to their communities in very significant ways. It is always a special inspirational breakfast that is held to honor these professionals who live their lives with “service above self” as part of their core personal and business values. Keller Williams Realty’s statement to the Realtors who have chosen to be a part of their international company is, “Building careers worth having, businesses worth owning, and lives worth living.” These are not common value states coming from corporate America. From my experience with this company, they are walking the talk regarding this important company mission statement. I will be attending this conference and will report back on topics that will be of interest to the East Bay real estate communities. Until next time…