Most housing markets experiencing slowdowns aren’t facing fundamental economic problems like job losses and out migration and will see prices correct, rather than collapse, in 2007.
That was the outlook of housing experts who participated in a conference call discussion Monday, “Housing Forecast 2007: Inside the Crystal Ball,” moderated by Inman News publisher Bradley Inman.
Barring an unforeseen jolt to consumer confidence or a sudden rise in interest rates, panelists predicted that nationwide, the volume of home sales in 2007 will be similar to or slightly below 2006 levels. But in order for that to happen, prices will have to come down in areas that saw rapid appreciation during the boom years.
A “good solid price correction will bring buyers back into the market,” David Lereah, chief economist for the National Association of Realtors, said. The economy, although not “robust,” continues to grow, he said, and a combination of wage gains and price drops will “make affordability better in many areas of the country.”
Although 75 percent of the country will “probably be in expansion mode” in ’07, Lereah said, “the real big boom markets will have a prolonged correction … (and) it’s anybody’s guess how far prices have to drop to get that correction.”
Lereah predicted home sales will hold at 6.4 million in 2007, down slightly from 6.46 million in 2006 and 7.07 million in 2005. A 50-basis-point increase in interest rates in 2006 might have put a deeper dent in sales, he said.
“I’m breathing a sigh of relief,” NAR’s top economist said of indications that sales may have bottomed out. “We got lucky because mortgage rates went down rather than up.”
Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California’s Lusk Center for Real Estate, doesn’t expect mortgage rates to go up or down more than 50 basis points in the year ahead because of “a huge flood of global capital looking for places to invest.”
But the panel agreed that credit could tighten next year if there’s a dramatic rise in delinquencies and defaults on nontraditional loans that helped fuel the housing boom. The growing U.S. budget deficit and foreign trade imbalance could also put pressure on interest rates, some said.
Richard Powers, general manager of GMAC Residential’s Ditech Home Loans, said he expects loan originations will fall between 5 percent and 10 percent in 2007, but that interest rates will remain “very competitive.”
Conway agreed with Lereah that “the housing market is correcting, and we are going to see further correction into 2007, but not a collapse.”
Real estate cycles “tend to be long, drawn-out affairs,” said Michael Sklarz, head of global research for New City Technology. Markets that saw huge increases in home-price appreciation are “just in the early stages” of a correction.
But unlike stocks and commodities, a correction in the real estate market doesn’t necessarily translate into a drastic reduction in prices, Sklarz said. Markets that exhibited “bubble-like tendencies” are now entering a “sideways period” where prices could stagnate for five to seven years, he said.
“Sales activity may hold up pretty well, but I think we should prepare for a long extended period” with little price appreciation, Sklarz said.
Boom markets headed for a prolonged correction include regions on both coasts that saw rapid price appreciation, plus Las Vegas and Phoenix, Lereah said.
The panel said Rust Belt states like Ohio and Michigan have deeper, underlying economic problems that will continue to weigh on the housing market. In a recent survey published by the Office of Federal Housing Enterprise Oversight, 18 of the 20 metropolitan statistical areas with the lowest rates of appreciation were in Michigan, Ohio and Indiana.
The region’s housing contraction is driven by job losses and out migration, Lereah said, and “there is no magic wand we can use” to fix it.
The rest of the country, by contrast, is experiencing an economic slowdown, but remains healthy, Conway said. “Job growth is steady, we have low unemployment at 4.4 percent nationwide, and stable, long-term interest rates. These are all solid indicators holding up the economy.”
Conway noted that parts of the Northwest, including Washington, Oregon, Idaho and Utah, are still experiencing double-digit price appreciation. “The housing market is still very much local,” Conway said.
In a market like Las Vegas, where new construction was driven by investors and speculators, prices could come down 10 percent or more, Sklarz predicted, with luxury condos hit harder than other types of housing. Conway said housing starts in the Las Vegas region are already off as builders react to the slowdown.
“Builders responded pretty quickly,” Conway said. “Many of those projects are not coming out of the ground.”
As is the case in parts of California, constraints on land use limit housing supply and bode well for the long-term health of the Las Vegas housing market, Conway said.
Lereah agreed, noting that Las Vegas’ new role as a wholesale distribution center means the economy is not entirely dependent on gambling. Although Lereah expects further price corrections in the next six months, the long-term prognosis for the Las Vegas market over the next two to three years is good, he said.
In areas of south Florida where prices rose rapidly during the boom, there’s a large supply of inventory, especially condos, Lereah said. Rising insurance costs in the state’s coastal areas are prompting others to put their homes up for sale.
Lereah predicted baby boomers looking to retire to a sunny climate will begin settling in northern Florida, which is viewed as less risky to natural disasters and price swings.
Some are choosing to leave the Sunshine State behind — although it’s taking them awhile to unload their homes, and they’re not getting what they used to for them.
A Raleigh, N.C., broker told the panel about a “trickle down” effect he’s seen among buyers relocating to the area from Florida. The homes they leave behind stay on the market longer, and they show up in North Carolina with less cash, the broker said.
Lereah said he calls such buyers “half backs” — people who moved to Florida from the Northeast and now want to move halfway back, stopping in places like the Smoky Mountains and North Carolina.
Although investors are blamed for inflating prices in some markets to unsustainable levels, they haven’t abandoned those markets completely.
Drawn by rising property values in their own countries and a weakening of the dollar, foreign investors from Latin America and Europe continue to buy property in Florida, Lereah said. Some 15 percent of homes sold in Florida are purchased by non-U.S. residents, he said.
Conway said Chinese investors continue to buy high-rise condominiums in Las Vegas, often for use by corporations, and that foreign investors have a “big interest” in California.
Rising rents in California have helped long-term investors profit from rental properties, she said.