Worst-case scenario for housing next year Part 2: 2006 real estate forecast
By Janis Mara
Inman News
Editor's note: This is the second part of a two-part story looking at housing market conditions for 2006.
The scene opens on a devastated landscape, with the voices of a thousand wannabe homeowners crying out in pain. Congress has enacted limitations on mortgage-interest deductions; interest rates have hit 8 percent; creative loan products have been curtailed; investors have fled to the stock market and first-time buyers can't afford a house.
At least, that's the worst-case scenario for 2006, according to various possibilities suggested by experts and industry observers consulted by Inman News.
Though different folks painted the future with different strokes, one theme was consistent: interest rates will be the most important factor affecting the industry in 2006. And, though the sign of the beast is 666 in the Bible, the bad-luck number for mortgage interest rates is 8 percent, a number of experts said.
"If the (long-term) interest rate went over 8 percent it would impact the market," said James Wright, president/principal broker of Century 21 All Islands in Honolulu.
"You tick the price up and make the monthly payment another $300, $400, and people who were marginal to begin with will be priced right out. The pool you'll hurt the worst will be the first-time buyers," Wright said.
A real estate analyst also evoked the 8 percent figure.
"At 6 and 7 percent we still see upward movement or, at worst, sideways-moving price projections," said Michael Sklarz, chief valuation officer for Fidelity National Financial. "But at 8 percent, some markets have prices falling."
Christopher Cagan, director of research and analytics at First American Real Estate Solutions, agreed with Sklarz. "Prices would start to decline. But I don't expect that to happen."
Indeed, not one member of the group expected interest rates to jump to 8 percent. Generally, the pundits expected rates to remain historically low in 2006, going no higher than 6 or 7 percent at most.
Exotic loan products such as interest-only loans also figured prominently in many experts' worst-case scenarios. Some were worried about whether individual homeowners could handle the loans; others focused on investors.
"People with adjustable-rate mortgages, as long as their mortgage payment doesn't go up too fast, they will probably do everything they can to hold on to their house," said Delores Conway, director of the Casden Forecast at the University of Southern California Lusk Center for Real Estate.
"But if you have a speculator who took out an interest-only loan, planning to flip the property for profit in a short time, and the prices go down, they might just walk away from it," said Conway.
"There's a lot of homes and condos being built around the United States," said Mark Dotzour, chief economist at Texas A&M University's Real Estate Center. "The danger is that a large percentage of that demand is from speculators and investors. Those people can decide to start investing in Wall Street again, and demand can vaporize.
"In a town where demand from them is between 20 and 40 percent, you could end up with a massive amount of overbuilding," Dotzour said. That could leave builders in a bad position, the economist said.
"Subprime loans to individuals with impaired credit histories opened up the market to help them afford homes, but at the same time if interest rates rise and their mortgage payments go up faster than their incomes, they will encounter difficulties," said James Barth, senior fellow at the Milken Institute and finance professor at Auburn University.
One industry veteran predicted that exotic loans would be curtailed in 2006.
"The secondary market is tired of creative financing products and is starting to price against them," said Pat Stone, vice chairman for Metrocities Mortgage, based in Southern California.
Another worst-case possibility for 2006: tampering with the mortgage-interest deduction, Wright said.
Wright was referring to the fact that the President's Advisory Panel on Federal Tax Reform presented a plan to President Bush on Nov. 1, calling for replacing the mortgage-interest deduction with a more limited 15 percent tax credit, among other things.
The proposed change isn't seen as a serious threat by many, thanks at least in part to the spirited defense mounted against it by entities including the National Association of Realtors and the National Association of Home Builders.
During the final months of 2006, as inventory grew and some parts of the country witnessed a slowdown, the question on everyone's mind was, What about house-price appreciation? Are the days of mind-boggling price jumps over?
"The worst case scenario for home prices would be what everyone is screaming about - the so-called bubble would pop," said Cagan. "I don't think we're in a bubble, though." Cagan predicted a healthy normal market going up about 6-8 percent.
Folks used to the double-digit price growth seen in parts of states such as Florida, California and Nevada might see the experts' home-price growth predictions as a worst-case scenario. "I would think price appreciation will be in the lower single digits in the United States in 2006," said Sklarz. Industry veteran Steve Ozonian, CEO of Global Mobility, pegged home price growth at 5 to 7 percent.
Most of the experts said the moderating of house prices was a good sign, "a correction, not a catastrophe," as Cagan put it. Even the overheated markets in Florida, California and Nevada aren't in for a rude surprise, according to the experts, just a softening.
"The market is going to slow down," said Stone. "Ten to 30 percent fewer homes will be sold. The best case is 10 percent fewer; the worst case is 30 percent fewer."
Best-case scenario for housing next year Part 1: 2006 real estate forecast
By Janis Mara
Inman News
Editor's note: This is the first part of a two-part story looking at housing market conditions for 2006.
"Moderation in all things." -- Aristotle
As John and Jane Doe Home Buyer enter the year 2006, driving their Ford Focus down Main Street, they see a moderate number of townspeople buying lunch boxes and new work clothes, signifying modest job growth. As they pass a local bank, the automated ticker display registers interest rates at 6 percent. Best of all, flyers in the window of the local real estate brokerage show house prices reflecting modest appreciation.
At least, that's the best-case scenario for 2006 predicted by experts consulted by Inman News. Not only that, many of them said they believed this scenario was likely.
"A situation where the U.S. economy continues the modest job growth it has produced over the last year is the best-case scenario," said Mark Dotzour, chief economist at Texas A&M University's Real Estate Center.
"Modest job growth creates underlying demand for housing and very little threat in the way of inflation," the economist said. "That's what keeps interest rates at low levels like the ones we've enjoyed for the last five years. If we have moderate job growth resulting in low inflation and in turn a low mortgage interest rate environment, the U.S. will have another successful year."
The best thing that could happen in 2006? Continuation of low interest rates, according to Mike Sklarz, chief valuation officer for Fidelity National Financial. Also, a recovering economy, "which we seem to be in the midst of in a number of sectors," and a rebound in consumer confidence, Sklarz said.
"My guess is that prices will keep going up but at a slower rate," Sklarz said. "Some markets showed double-digit rates of appreciation this year. The more likely appreciation rate is in the single digits in 2006."
David Lereah, chief economist of the National Association of Realtors, also believes there will be "modest cooling."
"The market will be coming off of a five-year boom and experience a soft landing next year," Lereah said in a 2006 forecast released in late October.
"An uptrend in mortgage interest rates will cause some slowing of the sales pace, but we forecast 2006 to be the second-highest year on record and housing will continue to support the overall economy," Lereah said.
Lereah predicts that the national median existing-home price for all housing types, after jumping about 12.4 percent to $208,100 for all of this year, will grow by 5.3 percent in 2006 to $219,200.
Historically, home prices grow 1 to 2 percentage points faster than the rate of inflation. The Consumer Price Index is likely to rise 3.4 percent this year, and then ease to an increase of 2.7 percent in 2006.
James Barth, senior fellow at the Milken Institute and finance professor at Auburn University, said, "The best we can hope for is more of what we had," evoking the image of 2005's record-breaking market.
"I don't think there's going to be a housing bust at all," Barth said. "I think there will be a soft landing."
According to Barth, "The best-case scenario would be growth in the economy without inflation worsening," though fast growth could worsen inflation and perhaps trigger further increases in interest rates and adversely affect housing.
"In my opinion, the best case would be a mild softening of sales prices and a slight increase in inventory levels," said Steve Ozonian, CEO of Global Mobility and industry veteran. "We're absolutely going to see inventories rise a little bit. We're going to see prices stabilize, but if interest rates stay at the current level, they're still historically attractive.
"As long as employment is on the upswing and interest rates stay at an affordable level, there's no reason to believe the market won't continue to flow very nicely," Ozonian opined.
Joining the chorus of moderates, Christopher Cagan, director of research and analytics at First American Real Estate Solutions, said, "The best scenario would be to go back to a healthy, normal, sustainable market going up 6 percent, 8 percent (home prices), with mortgage interest rates remaining where they are or perhaps a little higher."
Predicting a 5 percent growth in house prices nationwide, Cagan said, "I wouldn't mind if California slowed down (in price appreciation). That would be good for California," referring to the state's hot - indeed, according to some, overheated - market.
"California, Florida, Las Vegas have their cycles," Cagan said, referring to the fact that all three have experienced record activity in recent years. "Any market where prices have doubled in five years can have a correction. I don't think it will be a terrible one. It will not impact the overall market dynamic."
While the demand for houses in Florida and California will remain strong, price appreciation will slow in those areas, said James Wright, president/principal broker of Century 21 All Islands in Honolulu. "California is experiencing more inventory on the market and the price point will follow."
Perhaps the most starry-eyed - or, rather, sunny-eyed - optimist of the group was Wright.
Though prices went up 30 percent in the last two years, Wright is positive that double-digit appreciation will continue in his market in 2006 - indeed, for a number of years to come.
"The baby boomers are out there, they've had a lot of good years of earnings, they've inherited wealth," Wright said. "They are buying trophy homes and will be for years. We are one of those places people dream of. They come here to buy a piece of that dream."
Visit
www.inman.com for more real estate articles
Dropping the real estate boom in 2005
The real estate market slowed in some markets in 2005
By Glenn Roberts Jr.
Inman News
Some real estate professionals may remember 2005 as the beginning of the end of the boom -- the year when the housing market let out some steam and began to fall back toward Earth. Some super-heated markets cooled as interest rates climbed, for-sale inventory grew and home-price increases moderated.
This is the year that Federal Reserve Board chairman Alan Greenspan described "signs of froth" in the real estate market, where prices have in some instances risen to "unsustainable levels," adding that, "we certainly cannot rule out declines in home prices, especially in some local markets." His statements sent real estate industry groups scampering to shore up public confidence in the health of the market.
National statistics don't paint a detailed picture of a localized real estate downturn, though, and 2005 was actually another smash hit for the U.S. real estate industry at large. Sales of existing homes are on track to beat last year's record, according to National Association of Realtors statistics, and the rate of home-price appreciation is on pace to beat the 2004 rate.
For the first 10 months of the year, the rate of existing-home sales was about 4.6 percent above the rate for all of 2004. Median home prices in October were up about 17 percent from October 2004, the trade group also reported. But inventory of for-sales homes grew significantly in that time, too -- the months' supply of for-sale existing homes grew 14 percent.
The Realtor association's chief economist, David Lereah, said in a statement in late November, "We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing. Housing activity has peaked and is coming down a bit, and we expect further cooling in the coming months."
Lereah and several other industry economists have predicted a soft landing for the U.S. real estate market as opposed to a bursting bubble, though economists have also acknowledged that some local real estate markets could suffer more dramatic slips as the market turns.
As for new homes, price increases are on a slower pace this year than in 2004. While the median price for new homes jumped from $195,000 to $221,000, or 13.3 percent, from 2003 to 2004, the median new-home price for the first 10 months of 2005 is up about 3.2 percent compared to 2004, according to U.S. Census Bureau and U.S. Housing and Urban Development Department statistics. And while new-home sales increased about 10.8 percent from 2003 to 2004, that rate of increase has slowed to about 7.6 percent for the first 10 months of 2005 compared to the first 10 months in 2004.
The U.S. Office of Federal Housing Enterprise Oversight reported this month that average U.S. home prices increased about 12 percent in the third-quarter of 2005 over third-quarter 2004, down from 14 percent from second-quarter 2004 to second-quarter 2005. During the first half of the 1990s, year-over-year house-price increases were more commonly in the range of 2 percent or less.
The office's chief economist, Patrick Lawler, noted in the Dec. 1 announcement that "price momentum in the Pacific and New England states, in particular, has pulled back," and there is "some deceleration ... in a number of the faster-appreciating markets." House prices grew about 12 percent in the past year while the price of other goods and services increased about 4.5 percent, the office also reported.
Real estate agents in slowing markets have said that sellers are in some cases unrealistic about the value of their homes and the continuing rate of price appreciation, and this has led to high listing prices, fewer offers and longer time on market. Some buyers, they say, are getting priced out of the market by rising prices and interest rates.
Peter Casey, a past president of the Massachusetts Association of Realtors and president and CEO for Prudential Wilmot Whitney Real Estate in Weston, Mass., said, "The market is beginning to normalize, inventory is coming into balance. It's not a frightening market."
Sellers in his market area still "have an inflated vision of what their home is worth," he said, though they will undoubtedly adjust to the changing market. "Eventually sellers will catch on," he said.
Paul Sears, a broker-owner at Sears Real Estate in Springfield, Mass., said that properties in his market area were taking about twice as long to sell, on average, than in the prior year, though sales are still high.
An ocean away, in Hilo, Hawaii, some of the local buyers are getting priced out of the market, said Russell Arikawa, a Realtor at Ginoza Realty. "Low inventory and high prices are eliminating a lot of local buyers. They're struggling, searching, searching," he said.
Arikawa's wife, Carol S. Ginoza-Arikawa, principal broker and owner of Ginoza Realty, said many of the buyers are from California and other Hawaiian Islands. The market is "slowing down a little bit," she said.
In California, Realtor Joanne Dover of East Bay Real Estate Network, in the San Francisco Bay Area, said, homes that are priced right continue to sell quickly, but some sellers are slow to realize that prices are moderating. "The market is still good," though some of the higher-end homes are taking longer to sell, she also said.
Robert Campbell, a real estate adviser and author of a real estate investment book, "Timing the Real Estate Market," has a much more dire view of the California real estate market. "I believe the California housing market is a bubble that is nearing its final hours," he wrote in a Nov. 14 real estate advisory for Southern California investors. "It could be a rerun of the stock market bubble in the 1990s," he said, adding, "I believe a 40 percent price correction is likely" in California.
"As the California housing mania ends and the concept of risk returns to its rightful place, there is going to be a rush for the exit doors," he also wrote.
The condo market is coming out of the clouds in some parts of the country that saw feverish construction and investor activity over the past few years, Inman News has reported, and experts have cautioned that some parts of the country are at risk of building too many condo units too fast for the market to absorb. The Mortgage Bankers Association, in a September report, "Housing and Mortgage Markets: An Analysis," for example, cautioned that, "historically condos have experienced a greater level of price volatility" than the general housing market.
The report also stated, "The ability of apartment owners and developers to quickly bring a large number of condo units onto the market is a risk factor in certain markets. A sudden ramp-up in supply could lead to a decline in prices."
Visit
www.inman.com for more real estate articles
