Bankrate.com
Real estate revival on (distant) horizon
Thursday November 8, 6:00 am ET
Craig Guillot


It may still have to get worse before it gets better, but the residential real estate market shows signs that demand is building and home values may start recovering in 2008.

It seems there's bad news for the housing market every day. More mortgage resets coming in the next year, tightening lending standards and a glut of homes on the market all point to sinking home values in the near future. And economists have differing opinions on when a recovery might happen.

The National Association of Realtors recently reported that existing single-family home sales dropped 8.6 percent to a seasonally adjusted annual rate of 4.38 million in September, compared to a pace of 4.79 million in August. That rate is 19.8 percent below the 5.46 million-unit pace from September 2006, and the median existing single-family home price was $210,200 in September, down 4.9 percent from the same time last year.

But there is some encouraging news. Lawrence Yun, chief economist for the National Association of Realtors, or NAR, believes that home values may start recovering next year because significant demand has been accumulating. He says that prices actually continue to trend upward in the Northeast, Midwest, throughout the condo sector and in areas that are not dependent on jumbo loans. Running counter to the negative news, Yun says that in the past two years more than 4 million new jobs have been created, wages have been rising and that Americans accumulated $4 trillion in wealth through the stock market. He says that many people may have been priced out of the market but haven't yet entered due to a lack of confidence and a plethora of bad news.

"Many people may just be wondering if it is better to buy later rather than now. Whether that is now or later, buyers are (and will be) able to re-enter the market at a more attractive price and a much larger selection of inventory," says Yun. "Mortgage rates are still favorable, and the Fed is likely to cut rates once more before the end of the year."

As desperate sellers are forced to cut their asking prices and as home builders slash prices to get rid of excess inventory, it is inevitable that some of those bargain shoppers will jump at offers and, in turn, slowly put upward pressure on sales and prices.

The Commerce Department reported that sales of new single-family homes actually rose 4.8 percent in September 2007, with a revised annual rate of 770,000 and median sales price of $230,000, compared to a rate of 735,000 and a median sales price of $232,100 in August 2007.

Yun also points to NAR data from the second quarter of 2007 that actually shows price increases in 97 of the 149 metropolitan statistical areas. Because high-population areas such as Florida, Nevada and California have led the downturn, it can sometimes mask the fact that the overall market has remained stable throughout most of the country.

Yun says Utah has still seen growth and that Texas is ripe for price gains because of the strong job growth. Much of the South -- except for Florida -- has remained stable. With declining inventories, he also expects Denver and Boston to switch to positive pricing in the near future.

"For the vast middle part of the country, we are actually seeing price increases. We found that only about one-third of the MSAs (Metropolitan Statistical Areas) were actually seeing prices contract," Yun says.

Moody's Economy.com economist Patrick McPherron isn't so confident about a fast housing recovery and anticipates the market staying down at least through 2008. He says that a weakening in the economy and financial markets, combined with higher guidelines for mortgage lending, will drive down demand. The homeownership rate peaked at 69.2 percent in 2004 and now stands at 68.2 percent. McPherron says that 1 percent difference may seem insignificant, but shows a steady decline and means that a lot more homes will likely go unsold.

"There is constant pressure on supply that is just now starting to alleviate, and you have all these additional homes coming in because of foreclosures and short sales. You now have an enormous amount of supply facing restricted demand and prices have to come down (further)," says McPherron.

Paul Kasriel, chief economist with Northern Trust in Chicago, also anticipates further weakening in the housing market because of growing inventories. He also believes that the wave of foreclosures isn't over and points to the $683 billion in subprime mortgages that are due to reset between now and the end of 2008. Those foreclosures will put even more homes on the market that will likely be sold at a discount by creditors that take possession of the homes.

"I think you'll see an increase in auctions with prices being slashed. I think prices are still going to be weakening for a while and it looks as though we're only in the early stages of homeowners capitulating in terms of their asking prices," says Kasriel.

While the housing downturn may not be good for the overextended homeowner or mortgage lender left holding the bag, many economists agree that it is healthy to make a transition to a housing market driven on fundamentals instead of speculation. McPherron says that in recent years, homes were being treated more as assets than consumption goods. That mind-set, combined with low interest rates and new mortgage innovations, including interest-only loans and teaser-rate adjustable mortgages, caused people to rush into houses not in search of shelter but high returns.

"The shift is going back toward the real value of the home because the price is so high that people are wondering if they should be in a home or if they could wait for a year for prices to come down," says McPherron.

Yun also believes there was an excess push in the market through speculation. He points to the fact that the markets with the largest number of investors and speculators, such as Florida, Nevada and Arizona, had the biggest excess in price increases. As home prices started to decline, many of the investors were put upside down and the demand from that group has quickly disappeared.

"On a long-term horizon, things don't look that bad. We're just moving through all these excesses that occurred. The markets that had a large investor presence are the markets that are seeing a major decline," says Yun.

Yun also believes that the drying up of the subprime lending is a healthy thing, and that as speculators leave the market, housing will now be driven more by fundamentals. He says that there will be more of a revival in Federal Housing Administration, or FHA, loans to meet the needs of the subprime market and, like most economists, doesn't think all these risky loans are a healthy thing for the overall economy. When the housing market does see a turnaround, Yun anticipates a healthier growth pattern driven by traditional family homeowners instead of investors.

"I think traditional families will buy the homes as opposed to investors. The growth rate will be steadier as opposed to the ramp-ups that we've recently seen," says Yun.