MIAMI — The housing market in some parts of the country has slipped into a short correction that’s not expected to be as severe as past downturns but strong enough to challenge the real estate industry to rethink business practices.
“Realtors are in for a very tough road,” said Richard DeKaser, senior vice president and chief economist for National City Corp. “They make money on transactions, and we will see a 25 percent decline over the next 12-month period with all kinds of pricing pressure coming,” he said during a panel discussion at Inman News‘ Connect High Net conference this week in Miami.
Lenders, on the other hand, have one silver lining, he said. Mortgage volumes will be down, but many consumers migrated from the traditional 30-year fixed-rate mortgage to adjustable and other newer loan products during boom years, and they will create some refinance business for lenders in the next few years.
John Tuccillo, founder of John Tuccillo & Associates and former chief economist for the National Association of Realtors, said the problem for many agents will be their lack of experience working in a down market.
“Seventy-seven percent of Realtors in this country have never been in a down market,” he said. “They don’t remember what tools they used … if they hadn’t seen it before then they need to find someone to show them what to do now.” Agents need to learn how to work their risks and their databases and also how to market again because they’ve not had to do much beyond taking orders in previously hot markets, he said.
“When it’s that kind of market, it’s like being laid up in a hospital bed and you get up and your muscles don’t work,” Tuccillo said.
The economist thinks the number of agents in the business will level off, though he’s not predicting a “wholesale slaughter.” He also expects some consolidation of brokerage companies during the slow market.
While Realtors will be in for a rough ride, panelists agreed that the average home buyer should not worry too much if they are buying a home to live in for a number of years. “If I was a buyer looking to live in the home I wouldn’t worry about trying to time the market,” said David Stiff, senior economist with Fiserv CSW.
Stiff said the current housing correction “will be far less severe than it was in the ’80s.”
Investors, however, will really want to examine what they are buying before jumping into markets right now. Investors in markets like Florida and Las Vegas will have a difficult time obtaining enough rental income to stay on top of their investments, he said.
Tuccillo said investors should examine market fundamentals such as employment and population growth before making a move.
The housing correction is expected to last about two years in the markets that were overheated and subject to speculation, according to Stiff. Those markets included Las Vegas, Phoenix, Miami, Washington, D.C., and many markets in California.
During this down period in real estate, National City Corp.’s DeKaser said that 40 percent of all single-family homes are at risk of losing dollar value.
Another effect of the slowing market will be the squeezing of so-called exotic mortgage products, which include option adjustable-rate and interest-only mortgages, among others, panelists said. While DeKaser said he believes these are positive products, he does think they will go into remission while the market plays out.
Exotic mortgages have received a lot of scrutiny from regulators and consumer groups who say that many borrowers may have overleveraged themselves and are vulnerable to default and even foreclosure if their payments adjust beyond their means and their homes’ values fall during a correction. Proponents have said these loans have enabled many consumers to buy in markets they otherwise could not have afforded.
National City Corp. owns First Franklin, which was the first lender to offer the interest-only loans to the middle market, DeKaser said. But other lenders jumped in and the product became “imitated poorly,” he said. “By 2005, we were willingly surrendering market share to participants we feel were not pricing rationally.”
While financial markets have been able to figure out how to manage risk with these loans, many say that consumers are not handling it as well.
“If you look at the bankruptcy rate — it’s gone up since 1999,” DeKaser said. “As credit became more widely available, lenders figured out how to price it properly, but consumers did not.”
Consumers will need to be more educated about these loans, but the lending community will do well either way, he said.
Panelists also discussed how the high-end housing markets will perform during a slowdown. The high end of the market is multiplying, DeKaser said, and it’s difficult to generalize patterns within this group.
“The ‘uberrich’ are growing in number and in share in the national income, so if you’re catering to this clientele I wouldn’t be particularly worried,” he said. But he does worry about the segment of the upper market in which young professionals may be buying and assuming that they can’t go wrong. “This is where I see some vulnerability.”
Tuccillo said the segment he sees as having the most vulnerability are the buyers who stretched up to a bigger house.
Stiff of Fiserve CSW said the baby boomer generation has collected a lot of wealth and is driving the market for high-end homes. This generation is continuously trading up.
“I think what this short correction will do is make people think of the home as less of an investment and more for consumption,” he said.