2006 was the year that some real estate forecasters had been predicting for several years. It was the end of the boom that was characterized by historically low interest rates, frenzied sales, large-scale new construction and rapid price appreciation. But it was not a bust, as many real estate markets in the country still experienced above-average sales.
“All of the sudden this seller’s market had morphed into a buyer’s market,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies. The signs began to appear toward the end of 2005, he said, that the market was in transition. “It seemed sudden at the time though all the signs were there before.”
Those signs, he said, included double-digit home-price appreciation, increasing investor interest and a rise in unconventional mortgage products that “acted almost as a steroid on the residential sector.”
Besides the obvious downturn, there were other goings-on for the real estate industry this year, too, including layoffs by mortgage companies and other industry participants, the retreat of investors, the offer of incentives by home builders and developers to expedite sales in slowing markets, and a belt-tightening among brokerage companies.
It was also a year of continuing innovation and the adoption of new Web applications by new and existing real estate companies alike. 2006 saw the launch of Zillow and other free home-valuation Web sites that put loads of real estate data in the hands of consumers, for example.
While there were heated discussions about the potential for a housing market bubble in 2000 and 2001, the market continued to boom for several more years.
“The year (2006), as we look back … will not seem like a very bad year,” Retsinas said. Indeed, 2006 will likely place in the top five for its sales activity, he added. “We had such a strong tailwind coming in. We entered the year with a tailwind and the tailwind became a headwind. It really was an inflection point in the housing market.”
With the “perfect vision of hindsight,” Retsinas said it is clear that the slowing began late in 2005. “Everyone knew you couldn’t sustain double-digit appreciation,” he said.
The National Association of Realtors, in a November forecast, said that existing-home sales are expected to drop about 8.6 percent this year compared to last year, and to fall another 0.6 percent in 2007. Meanwhile, the U.S. Commerce Department reported that housing starts hit a six-year low in October, and the rate of new single-family home sales was down about 25.4 percent that month compared to October 2005.
Realtors reported that the median U.S. existing-home price in October was 3.5 percent below the October 2005 price, while the average U.S. home price dropped for the past four months through October and was 3.3 percent lower than in October 2005.
Despite these sliding statistics, the slowdown in 2006 was not a nosedive, say real estate experts. While it may seem logical to compare the current housing market conditions to the recession of the late 1980s and early 1990s, Retsinas said that there are some fundamental differences. “That was a time of double-digit interest rates, that was a time of double-digit unemployment,” he said.
The economy is stronger now than it was during those times, though housing analysts are watching employment numbers carefully for clues about whether the economy will weather the real estate downturn without a recession.
“The real question as we end this year is, ‘What is going to be the contagion effect (of the real estate sector) on the overall economy. Will it slow it so much that the economy will really struggle, that we start having job losses rather than job growth?’ ” said Retsinas.
There was evidence of overbuilding in some markets this year, he said, and those markets with overbuilding and a high investor share of purchases may be more prone to problems.
The inventory of for-sale homes is large but it may be stabilizing, Retsinas said. “It doesn’t seem to be growing. There are early signs that it may be a quarter or two away from bottom.”
Unconventional mortgage products, which made home ownership possible for a broader group of consumers, also can feature adjustable rates and other features that would hike up mortgage costs over time. And while those loan products represent some volatility for homeowners in a slowing real estate market, Retsinas said that a good number of homeowners who entered into these unconventional loans appear to be refinancing into more traditional loan products.
Edward Leamer, director for the University of California, Los Angeles, Anderson Forecast, said that a lot of homeowners can also rely on an “appreciation cushion,” as their homes have appreciated significantly since purchase and they will still be able to sell at a profit.
A rise in interest rates may have been the precipitating factor for the slowing housing market in 2006, Leamer said, adding, “The big problem is the disconnect between prices and affordability.” The housing boom followed normal patterns until 2002, he also said, when there were “five years of extraordinary appreciation.”
This year was definitely a “comeuppance” for the housing market that featured a dramatic reduction in sales volume for existing homes and faster-than-expected slowing in the market for new homes.
Investors pulled out of the market and consumers may have reacted as investors to changing market conditions, he noted. “A lot of people, whether explicitly or implicitly, were thinking like investors.”
Major home builders have been offering special incentives to consumers in slowing markets in an effort to stimulate new-home sales. Some builders and mortgage companies have announced layoffs to help trim costs in a slowing market. Countrywide Financial Corp. has announced plans to layoff about 2,500 workers, and Washington Mutual earlier announced plans to layoff about 1,400 workers.
Major real estate brokerage company Realogy, formerly a part of Cendant Corp., has announced plans to trim operating expenses by about $60 million per year through the combination of merging, consolidating or closing 100 company-owned real estate offices. And other companies have announced plans to trim marketing expenses by shifting focus to online sources versus print.
Kenneth Jenny, CEO and managing partner for real estate consulting company tranCen, said the media may have had a role in the housing slowdown, and other real estate industry participants, too, have blamed the media for impacting consumer attitudes about housing. “The influences that created this cycle are different than others — they aren’t so much economic as they are media-driven.
The media can act like a match starting a wildfire when it comes to consumer perception about real estate market conditions, Jenny added. “Stopping it is really difficult. Whether it’s true or not, it can turn the whole thing into a house of cards.”
While investors have moved on, there are still people who must sell homes and people who must buy homes, and these people continue to fuel the market, Jenny said. “The market itself has become right-sized. A right-sized market doesn’t allow quick, inflationary numbers.” He said that flippers have largely left the market, which has taken away some of the frenzy that existed during the boom.
Meanwhile, mortgage rates remain very good compared to past real estate cycles, he said. “I was selling real estate when mortgage rates were 16 percent. I don’t see (rising interest rates) as a factor. The influences that created this cycle are different than others.”
Affordability is a problem in some markets, he said, adding that oversupply and sagging sales will take care of that problem. “There is one cure for high prices and that’s high prices — if the price is not in conjunction with what the buyer is willing to pay then you’ll be sitting on the market (waiting) for a high price. If you don’t make an adjustment to attract buyers out there now, you’re going to miss the market.”
Leamer of the Anderson Forecast said that current demographic trends remain promising for the U.S. housing market in general, though these demographic trends move more slowly than market fluctuations. “The demographic factor is something that moves like a glacier, very slowly. It doesn’t account for extremes,” he said.
And while interest rates rose in 2006, Leamer said that the Federal Reserve has been less aggressive than usual with rates — the federal funds rate had been sitting at “incredibly low levels” prior to a series of 17 consecutive increases that ended in August. The rate now stands at 5.25 percent.
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