Posted on 10/31/2005 11:28:13 AM PST by ex-Texan
SAN FRANCISCO, (KRT) - A combination of higher interest rates and years of rising prices could soon take some air out of the hot U.S. housing market.
"The boom is showing some signs of tiring," David Lereah, chief economist with the National Association of Realtors, said Friday. "We are looking at about a 4 percent drop in home sales next year.
"We are projecting a significant drop in the price appreciation pace," Lereah said.
But even though the velocity of the housing market will subside, "we are looking for a soft landing," he told real estate agents from across the country who are meeting in San Francisco.
Economic forecasts have been mixed in recent months, but Lereah is the latest high-profile housing-sector economist to forecast a decline in housing.
David Seiders, chief economist of the National Association of Home Builders, said recently that the housing market is "topping out."
The Realtors association is forecasting that home appreciation will slow from a nationwide average of more than 12 percent this year to only about 5 percent in 2005. In hot markets, the falloff could be more pronounced, Lereah said.
"Some markets are more susceptible to interest rate risks and shock," he said. "I cannot guarantee that there will be no hard landings."
Cities including Las Vegas; Orlando, Fla.; Phoenix and Washington, D.C., are on the Realtors' list of areas that have seen the biggest home price increases in the last three years. Markets like Dallas; Detroit; Austin, Texas; Houston and Denver have remained cool.
"The country is really unbalanced when it comes to the price of a home," Lereah said. "The boom has really discriminated across America."
Many cities are already transitioning from a sellers' market to a buyers' market. And the time it takes to sell a house is increasing in many cities.
"Eventually that seller will have to revise his expectations downward," Lereah said. "Instead of getting 20 percent appreciation in their home they will have to get 5 percent."
Even with the forecast decline in sales next year, housing activity remains at a very high level. And Lereah said the market is fundamentally sound.
"In the real estate market, there is not hard evidence we have bubbles waiting to burst," he said.
But higher interest rates alone will cause a softening in home sales, economists agree.
"Mortgage rates are going up, but they will still be below 7 percent," Lereah said.
While still low by historic standards, he said that mortgage rates approaching 7 percent "could be more troublesome" for some of areas of the country.
The increased use of adjustable-rate mortgages and so-called "exotic" home loans has made some homeowners more vulnerable to higher interest rates. Adjustable-rate loans make up about 30 percent of the mortgage market, Lereah said.
"The biggest risk I see right now in California and other parts of the U.S. is the element of risk introduced by adjustable-rate mortgages and interest-only loans and negative amortization loans," he said.
"When it comes to these exotic loans _ even though it may slow home sales a bit _ I'd like to see stricter guidelines so we can slow housing a bit so we can have a soft landing."
Lereah said among the real threats to the continued health of the housing market are proposals in Washington to cut tax deductions for home mortgage interest and property taxes.
"In my opinion it's terrible timing - it's almost irresponsible," he said. "That would do severe damage to a lot of the local markets across the nation.
"We are looking at probably a 10 to 15 percent drop in home prices" if the proposals become reality.
"Ok, maybe your part of the country is immune to the coming economic effects of the housing bubble slow leak."
Immune? Only if a generalized recession isn't brought on due to a drop in consumer spending elsewhere in the country, if refi money goes away.
Good post.
You want to buy now?!?!
Here's the problem. I live in Modesto, where the average household income is about $50,000 a year and the median home price is $400,000 or so. Any economist, heck, any high school kid, could tell you that this ratio is unsustainable. So why are housing prices to high? People from the Bay Area (where the median income is $80k-$100k) buy here because it's comparatively cheap and drive the housing prices up.
Here is why this affects you: People who work in Modesto can no longer afford to buy here, so they buy down the freeway in Merced and commute into Modesto every day. This drives the value of homes in Merced way up, since Modestans have much higher incomes than Merced(ites? ians? ers?). People from Merced and the surrounding areas are priced out of their own local markets as a result, so they look for somewhere else in commuting range. A LOT of the real estate sales further south in Central California are indirectly driven by people who are economically displaced thanks to market pressures originating in the Bay Area.
Now, with interest rates rising, the housing markets in Tracy, Patterson, Modesto, Stockton, and other outer rings of the "Extended Bay Area" become less attractive to home buyers. I'm constantly amazed that people will commute 4-5 hours a day to save $500-$800 a month on their mortgages, but they do just that. When rising interest rates narrow that gap to the $100-300 a month range, far fewer people will see it as worthwhile. When that market pressure evaporates, prices in this area will drop. They already are in high end homes where prices are already down 10% in many neighborhoods. We also have new developments that, for the first time in nearly a decade, have lots sitting unsold for weeks and MONTHS.
When the market in this part of the valley drops, less people will commute from the south, lowering market values there. This will set off a ripple effect that will lower values from Sacramento to Bakersfield.
If you must buy, just keep in mind that housing dips only affect those who plan on selling. Make sure that you plan on staying in whatever you buy for a decade or so, and you'll be fine. Market drops only hurt if you're refinancing or selling.
A key point. These 'creative' solutions, such as loans which initially have interest only payments, have yet to be tested by a tough market.
Anyone have a good, accurate read on NYC? I am prepping my condo in Chelsea for sale this month, and am concerned. Thanks.
NYC real estate has been going *down* in recent months from what I've read...
A key point. These 'creative' solutions, such as loans which initially have interest only payments, have yet to be tested by a tough market.
It will be interesting to see what happens when those paying their 4.50-5.00% 3/1 rates have their loans adjust to 6.50-7.00%. On a $200,000 IO loan, someone paying 4.50% at a payment of $750, the new rate will most likely be 6.50%, which will jack up the new payment to $1083, unless of course the borrower has used the extra money to pay principal down. On a $300,000 loan, the payment will increase $500 per month. And if they have to repay principal, the payment will increase $860 per month. It will get even uglier with the MTA loans (aka option ARM's), where there will be negative amortization. When the negative amortization reaches a certain point, the borrower has to repay the principal at the higher interest rate. This most likely will increase the amount of foreclosures which in turn will have to bring down home prices. The new payments will also have to have a dramatic affect on the economy as higher payments eat up any disposable income. I'm glad I'm renting right now.
New housing developments in Hagerstown, Harper's Ferry, and Gettysburg are still selling like hotcakes. These buyers aren't commuting into DC but into Rockville, Gaithersburg, and Germantown. It's still a mean commute but not impossible, as the real traffic headaches on 270 sometimes don't start until you get as far south as Gaithersburg exits.
I just hope the crash holds off until I can sell my Montgomery County house in the spring. Or if houses in my area decline in price, maybe prices in the area I'm moving to will decline as well, I hope.
Tell me about it.
In July I helped my son and his girlfriend buy a starter home in the San Jose/Cupertino area. A 40 year old 1850 sq ft 2 story which needs all the bathrooms kitchen and floors replaced. It was listed in the high $700's and my son felt "lucky" to get it for just under $850K. A property which wouldn't fetch $300K in the Toronto area. And he'll need to put at least another $100K into it to get it to todays specs....
I don't get it. He and his girlfriend make good salaries, but they could loose those at a moments notice..
The good news was that someone bought his girlfriends 2 bdrm condo (which was also in the area) for just under $500K (she'd paid LT $300 for it about 5 years ago), so at least they were able to put a few buck down on their house..
But still, it's getting a little wacky out there..
There is going to be a tidal wave of foreclosures in the metro Detroit area once the automobile and auto parts workers get their wages cut in half during the next 2 years. This will ripple throught the economy creating additional bankruptcies and forclosures in the service sector. You will be able to pick up homes in beautiful suburban areas for 50 cents on the dollar.
This is because Geo Bush is expanding the federal government like there's no tomorrow.
It won't crash but you will have accept less than last spring unless you want it to sit on the market. At this point you have about 25k listings to compete with. By late winter that might be down a bit, but not much. I would get the house on the market early next year or even december.
Inflation is startign to heat up. Except in extremely overvalued markets where price appreciation has been off the charts most markets will be flat or experience a modest decline.
It won't be a collapse like when the .com bubble burst though the press will treat it as such.
Has anyone noticed that the realestate markets where pricing has taken complete leave of its moorings are always liberal bastions ?
Yep, the doom and gloom Freepers have always had a hard time with investments doing well. I'm glad that my three properties in the D.C. area have doubled. I'll take that and a 15% drop that lasts a couple of years any day...
Doom and gloomers, keep on hiding your cash under your mattresses and we'll see who does better...
Yep, and I'm dead square in the middle of one of them. It has a lot to do with liberal land use policy. They limit the supply yet demand stays high. Prices skyrocket. Also, they get more in taxes from corporate land than they pay out. So they allow way more businesses to locate than the housing market can accommodate. Jobs need people - people need houses - houses are not there - prices go WAY up...
Not in Seattle.
Geography plus the land management legislation equals no end in sight for spiraling upward real estate prices. And as long as Californians are leaving their state with wheelbarrows full of cash to invest in "cheap" Seattle real estate, there's no end in sight.
"Won't happen here". I hear that from everybody everywhere. Even people in the middle of nowhere who say their prices didn't rise much so they can't fall. But take a look at inventory, in No VA it has more than doubled even though many people are moving into this area. But the newcomers can't soak up a 30k supply of listings. There are 45k new condos scheduled in the next 3 years, and condos currently are break-even year-over-year taking into account commissions. Take a comprehensive look around and you will see it CAN happen anywhere.
Ahhhhhh.... Refreshing to see an extreme liberal on FR (are you Algore? John Kerry?)! Amazing that you will actually be glad if and when people lose on their investments. A perfect democrat - hoping for people to be hurt, hoping for bad news...
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.