Housing market defies gloomy forecasts (reprinted from MSN Moeny Central)
Contrary to the expectations of many, the housing market didnt slow, flatten or plunge in the second quarter. And now, the squeeze created by Hurricane Katrina is expected to put even more pressure on prices.
David Lereah, NARs chief economist, said Tuesday that shortages of building materials, made worse by the need to rebuild in areas hit by Katrina, will increase construction costs.
Given the general tight inventory of homes available for sale across the country, rebuilding in the region of the
Gulf Coast will place additional pressure on overall home prices, Lereah says. As displaced residents try to get back on their feet in new locations, home sales have spiked -- along with rental demand -- in regions surrounding the disaster zone.
In addition, mortgage rates are likely to rise more slowly as the national economy absorbs the hurricane's $100 billion-plus blow, keeping sales brisk, Lereah said.
Lereah boosted his estimates of new and existing home sales for the year, seeing records for both. He said resales of previously owned homes should climb 3.4 percent to 7.02 million units in 2005, up from last month's estimate of 6.98 million for the year. New home sales should increase 6.7 percent to 1.28 million, up from his prior forecast of 1.26 million.
Economists have long expected some slowing in both the number of houses sold and in the prices they fetched. Instead, though, house prices registered the biggest price leap in 26 years in the second quarter, says the latest report by the Office of Federal Housing Enterprise Oversight. House prices rose 13.43% nationally between the end of the second quarter of 2004 to the same time this year. Many observers had been predicting that the housing market was inflated to the point of either bursting or at least politely deflating.
I was surprised, said Susan M. Wachter, a real estate expert at the University of Pennsylvanias Wharton School of Business. This was a possible outcome, (however) I have been and many of us have been looking for an easing of the price rises.
Certainly the report didnt rule out a housing market adjustment -- it showed only that it hadnt happened as of the end of June. As Wachter says, It may very well be that prices are easing while we speaking.
Unsustainable, experts say
The fundamentals do not justify this increase, said Wachter, particularly since the increases are occurring in the areas where the previous price rises were the highest. An adjustment seems inevitable, economists like Wachter say, because such monumental price increases are not justified by such economic fundamentals as rising salaries, low inflation and strong consumer spending that usually nourish stable, sustainable price increases. Even the national economy, while strong, is not strengthening over the last quarter, Wachter said.
This all points to the potential for continuing rising prices simply because of previous price rises -- continuing price rises at unsustainable levels -- which of course results in a bubble.
But Wachter emphasized that there is no single housing market in the United States. There are, instead, regional markets, and while some of those have been strained by speculation, others are simply enjoying reasonable growth.
The economy is full of wild cards suddenly. Restless oil prices and Hurricane Katrinas great but undefined effect are a couple, and their effect on housing cannot yet be judged, the experts said.
Housing is more affordable
To underscore the regional nature of the housing market, consider this: Illogical as it seems, housing is more affordable now, on average, than at any time in the last decade, says an analyst at PMI, the private mortgage insurer that charts housing market risk.
If you avoid looking at wild gains in highly publicized markets like San Francisco, the Silicon Valley, Boston, Atlanta and some of the New York and Washington, D.C. suburbs, you can find much affordable housing, says Marco van Akkeren, a PMI economist.
Salary increases averaging 22% over the last five years are making homes affordable, even as prices rise, says PMIs report on housing risk, issued in July. Judged affordable by the PMI standards are even such popular metro areas as Austin, Texas, Denver, Charlotte, N.C., Seattle, Portland, Ore. and the Florida cities of Miami, Fort Lauderdale and Orlando.
Depending on where you live, generally affordability is fairly good. Economic conditions have improved significantly. Employment growth is positive in most markets, and unemployment going down significantly, he said.
A slowdown, at least in some places
Some signals of a possible housing downturn are showing up right now in San Diego, judged by PMI as one of the cities most at-risk for falling prices. There, the median house price has risen 137% in five years while rents increased just 20% to 30%; salaries are rising only 4% a year, says real estate agent Arthur J. Chatroo. An entry-level condominium of about 700 square feet in a desirable area runs around $400,000 or $450,000 and up, he says.
Chatroo says he has been watching the San Diego market soften. Where once homes were scooped up quickly, now the inventory has ballooned to twice the size and properties stay longer on the market.
We are seeing a lot of reductions -- and very substantial reductions -- in the asking prices. Not so much in the sale prices. Some of the expectations of enormous profits, of enormous gains, are filtering out of the market, Chatroo said.
In comparison, it was very much a sellers market in summer 2004. Prices were still going up in June this year, but now its slowing and prices have flattened to as much as a 5% decline. It is, he notes, one of the slower periods of the year. But he has some new advice for buyers who expect a quick profit: Stay out of the market.
