Editor’s note: Many real estate markets have slowed, and the effects are now being felt by brokers and agents who are struggling through tougher negotiations, and buyers and sellers who are aware of changing times. Among consumers, the slowdown has shaken up expectations and attitudes toward home buying, causing them to worry about future price decreases.

Editor’s note: Many real estate markets have slowed, and the effects are now being felt by brokers and agents who are struggling through tougher negotiations, and buyers and sellers who are aware of changing times. Among consumers, the slowdown has shaken up expectations and attitudes toward home buying, causing them to worry about future price decreases. In this three-part report, Inman News examines three areas of impact: how the slowdown is expected to influence economic growth; problems created in the property appraisal process; and consumer attitude toward home buying. (Read Part 2 and Part 3.)

For several years during the blazing real estate boom, the big question focused on when it would end.

And now that the boom has leapt down from its peak and sales are more comatose than cometary in some major markets, the other big question is how far it will fall and whether it will drag down the nation’s economy.

The doomsayers have said the long run-up in housing prices coupled with rises in interest rates, declining affordability and rising foreclosure rates are a sure sign that the real estate market will blow up in the economy’s face, yanking it into a period of recession. Meanwhile, several real estate trade groups and economists have said that the market is in a normal, cyclical decline and predict a “soft landing” rather than a free fall — and economic slowing rather than a recession.

Most will agree that the real estate boom was a boost to the economy and the real estate downturn is now an economic drag.

Ken Rosen a professor of real estate and urban economics for the Haas School of Business at University of California, Berkeley, said the prolonged surge in real estate sales and prices was artificial in some ways because lots of buyers were purchasing homes as investment properties rather than as primary residences.

“That was a false boom in many markets. A lot of investors were buying houses who weren’t planning to live in them. We built too many houses because people weren’t planning to live in them — we overbuilt. It made the economy look stronger than it was,” said Rosen, who is also chairman of Rosen Consulting Group, a real estate market research company.

While housing groups have called upon the Federal Reserve to hold down the Federal Funds Rate to promote sustained strength in the housing market, Rosen said he believes it is a good thing for the housing market to cool down for awhile to bump home prices down to more affordable levels.

“This is the worst speculative bubble in residential housing that we’ve had. Lending standards were much too loose, interest rates much too low. We’re overdue for a correction,” he said. “In the end, mean house prices will be 5 to 25 percent lower in some markets, with a national house-price decline in 2007 and 2008. That puts (prices) back to levels they should be at.”

Rosen said he estimates a 35 percent chance of a U.S. economic recession in 2007. An annual trade deficit of about $800 billion and overextended consumers are risk factors for the economy, he said, and unexpected geopolitical events could also rock the country toward recession.

“The overall U.S. economy does have a huge issue competing globally — we can’t compete in a number of key areas,” Rosen said, such as manufacturing.

While Rosen said that the national economy as a whole might avoid recession during the real estate slump, some states and regions may suffer more during the housing slowdown. Florida, for example, is at a higher risk of an economic recession, and he expects a “big, sharp slowdown” in California’s Central Valley and in Arizona, Las Vegas and Washington, D.C. Generally, the areas that were most overbuilt are at the highest risk of economic problems, he noted.

“A three-year correction I think is necessary to get rid of excess inventory in these markets. (Gross domestic product) growth has been artificially high because of speculative housing activity. Interest rates are still low and I think are too low. I think the Fed will remain on hold and see where the economy goes. It’s a good thing that we’ll get back to the right level of houses provided for people who actually want to live in them. This (correction) is a good thing, not a bad thing.”

The U.S. real estate market will likely hit a low point in 2007, with a recovery beginning in 2009 and full recovery in 2010, Rosen said.

Likewise, the latest Anderson Forecast — a series of quarterly real estate and economic reports produced by an independent center at University of California, Los Angeles — predicts that a house-price correction will span several years but does not predict a national economic recession.

While there are several examples in which housing downturns have contributed to economic recessions, that will not likely be the case this time, according to the Anderson Forecast reports. “We forecast the economy is about to enter a period of several quarters of sluggish growth with inflation above the comfort level. Although not a recession, the unemployment rate will modestly increase and those sectors of the economy tied to residential construction will be in a cyclical decline,” according to one of the reports, titled, “Soft Landing with Turbulence Ahead.”

A separate Anderson Forecast report, prepared by forecast director Edward Leamer, states, “Ten times since World War II we have seen housing abnormalities like we have currently experienced and eight times we have had recession. The exceptions were in 1967 when spending for the Vietnam War offset weakness in housing and in 1951 when spending for the Korean War did the trick. Don’t hope for a repeat of those episodes. That cure would be much worse than the disease.”

Leamer also states that “we are not likely to experience recession-style job losses” though significant job losses could be enough to send the economy spiraling into recession. “There is nothing in the historical record that suggests we can get quickly back to normal (in the housing market) — after all we are going to have to get prices back in line with affordability, and that will take some considerable period of time. In the meantime, sales are sure to be way down.”

In California, a state that is home to many of the least affordable real estate markets in the country, the Anderson Forecast does not expect a recession or a substantial drop in house prices. “We are still firmly convinced that the national economy is the primary driver at the state level: statewide home prices are unlikely to decline significantly unless there is a recession. Real estate sectors will continue to decline, but without significant declines in another sector the net result will be a slowdown, not a recession,” according to the forecast.

Jack McCabe, CEO for real estate consulting firm McCabe Research & Consulting LLC, said the story might be different for Florida, which had also seen rapid price appreciation and a flurry of sales before the market turned.

“We’re going to see some pain ahead in many markets,” he said. “In many markets (in Florida) the vast percentage of the population can’t afford a median-priced home. The majority of jobs created in this recent boom — most of them have been real estate-related. A lot of real estate jobs are going to go away in the next three years.

“Many analysts are concerned that Florida could see some recessionary pressures beginning in 2007. We just don’t have any companies moving here anymore. Interest rates have gone up, (as have) property taxes and insurance costs. We’re not only seeing businesses not move down here but we’re also seeing Florida businesses relocate outside of the state.”

McCabe, like Rosen, said that a rush of speculative buying created an “artificial boom.” Some developers have sold blocks of unsold units to “vulture” or wholesale buyers to unload inventory, McCabe said — at discount prices and in some cases at a loss. And appraisers are using these sales as competitive comparables in a given market, which brings down the price of other properties, too, he said. Price increases are going to be “very, very limited … especially in places that appreciated over 100 percent in the last five years.”

Federal Reserve Chairman Ben Bernanke has said that the U.S. housing market is in the midst of a “substantial correction.”

Bernanke said this month that the downturn in residential construction has become “a major drag” on economic growth, the Financial Times reported. Bernanke also stated that there are “strong fundamentals” in the real estate market. Meanwhile, he said that other sectors of the economy appear to be relatively strong, and key questions remain for the Fed on how far the real estate correction will go and whether it will “spill over” into the U.S. economy as a whole.

The Fed will watch closely, he said, on how the real estate slump affects consumer behavior.

David Lereah, chief economist for the National Association of Realtors, has maintained a fairly rosy view for the near future of the U.S. real estate market and has said that he expects a fairly rapid turnaround in the slowing real estate market, owing largely to still historically low interest rates and demographic projections that bode well for continuing demand.

Some large home builders have been hammered on Wall Street by the slumping market, and several home builders have lowered revenue projections this year based on the quickly turning market conditions.

Robert I. Toll, chairman and CEO for home builder Toll Brothers, said in an August statement, “It is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders who built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction.”

That said, Toll also stated that the economy is “basically healthy” and “the market will return to firm footing” once the oversupply of homes is absorbed.

Meanwhile, Nouriel Roubini of the Roubini Global Economics firm has said that the nation appears to be on a crash-course for a major recession.

“The simple conclusion … is that this is indeed the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices. By itself this slump is enough to trigger a U.S. recession: its effects on residential real estate investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession,” he wrote in August.

And this month Roubini wrote, “The U.S. … is much more likely to experience a twin hard landing: that of housing is already and clearly occurring; that of the broader economy is well under way and very likely to lead to a recession by early 2007.”


Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription