Shelter in a Storm: Housing Market Expected to Stabilize in 2007

For many residential real-estate markets in the U.S., this year started with an advantage to sellers and ended with buyers holding the upper hand.
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But, unlike some people had expected, the switch didn't follow the deafening "pop" of a massive real estate bubble.

That spells good news for both buyers and sellers in 2007, as markets return to balance, prices moderate and, if interest rates remain subdued, sales begin to edge higher.
Many markets saw slower home-price increases and a build-up of inventory in 2006, much to the dismay of optimistic sellers. And while speculators — investors who many argue are partially responsible for the massive housing boom — tried to exit the market, buyers began waiting out the correction to get the best prices, causing a drop in home sales.

In many areas, however, the correction wasn't as harsh as some had feared. In fact, the year as a whole might even have been described as "healthy" if the country's perspective hadn't been skewed by the boom of the past few years, said John McIlwain, senior fellow for housing at the Urban Land Institute. The market is still "well within long-term norms," he said.
"I think the story of the year is the bubble that wasn't," McIlwain said. "Instead of a bubble busting, so far it has been a healthy correction."

One of the bright spots of this correction: stabilized interest rates. Rates reversed course and trended down beginning in the summer. Last winter, some interpreted increasing rates as a signal that the real-estate party was coming to an end; now, with the 30-year fixed-rate mortgage averaging just above 6% and a lot of inventory on the market, it's not a bad time to buy, McIlwain opined.

And it does appear that this period of correction may be soon drawing to a close, said Lawrence Yun, senior economist for the National Association of Realtors.

"The past three, possibly four months have been seeing more stabilizing patterns," Yun said.

Inventory appears to be topping off, monthly declines in home sales seems to leveling and mortgage purchase applications appear flat, he said. All are indicators, Yun said, "that perhaps the bottom has already passed or (the market) is trying to reach the bottom over the very short term."

In San Diego, one of the hottest markets during the boom, realty executive Vicky L. Campbell said she's seeing evidence of the stabilization in her local market. October and November turned out to be good months for sales, said the sales manager at Century 21 1st Choice Pacific. She's even more optimistic for the near future as prices become more realistic-as long as interest rates hold steady.

"We're going to have a really good year next year," she said.

But many markets aren't completely out of the woods yet. Campbell said that only those who need to sell their homes are doing so; Honore Frumentino, a Realtor with Koenig & Strey GMAC Real Estate in Deerfield, Illinois, agrees, adding that less-committed sellers are holding off if they can.

In Ned Redpath's corner of the Northeast, buyers aren't even looking at properties that are priced high, said the owner of Coldwell Banker Redpath & Co. Realtors, with three offices in New Hampshire and Vermont.

"Right now we're in the middle of a significant buyer's market," he said. "I feel right now we're at the bottom of this huge trough we've been in."

In this housing correction, economic fundamentals-a poor job market, for example-often isn't to blame. In fact, areas with strong job markets- including Florida, Washington, D.C., Nevada, Arizona and California-are experiencing the largest price adjustments.

"People have jobs, but are not buying homes because of the affordability factor," Yun said. That, or "they think that home prices will come down," and will postpone their purchase.

According to Campbell, "Buyers got tired of paying high prices." And sellers got greedy, prompting stubborn ones who wouldn't budge on price to watch their homes languish without offers.

Nationally, NAR forecasts the number existing-home sales this year will be about 8.6% lower than the 2005 level; next year, existing-home sales will be 1% lower than this year's level. New-home sales should be 17.7% lower than last year; the group anticipates that the number of new-home sales will slide an additional 9.4% in 2007.

Even in the midst of a downturn, 2006 will be the third-best year on record for home sales. But the high inventory has had an effect on the industry, especially home builders.
The Commerce Department reported that housing starts reached a six-year low in October. November's statistics, however, showed a 6.7% rise in starts. David Seiders, chief economist for the National Association of Home Builders, said he expects housing starts to bottom out in the first quarter of 2007.

Prices under pressure

Concerning prices, consider the Federal Housing Finance Board's telling report released last month: In October, the average single-family home purchase price was $306,258. That's down from October 2005's $306,759 average price — and the first time since 1992-1993 that the October-to-October average actually decreased instead of increased.

As the market started cooling, price cuts — as well as additional incentives — have helped inspire the sales that did take place and began the process of reducing inventory, Seiders said.

All that said, each local market is unique.

Some areas, including Seattle, currently have both a strong job market and home-price appreciation, according to Bill Riss, chief executive officer of Coldwell Banker Bain, based in the Seattle area. Other towns, including areas of the Midwest that never saw extraordinary gains to begin with, aren't experiencing much of a drop-off now.

In Chicago, Frumentino said that sellers need to be committed in order to sell in today's climate. Average homes are taking about three times longer to sell; luxury homes take longer. Homes between 15 and 30 years old are having the toughest time selling, she said.
"If you don't have a motivated seller or someone who has to sell … it may not be a good time to sell," she said. "It's turned into a buyer's market, the buyers know it and they're flexing their muscles."

Looking ahead
As long as interest rates stay modest, many markets should continue to soften a bit into next year and then improve modestly, McIlwain said. "I think sometime in the middle of the year, we're going to see prices stabilizing," he said.

More than one economist is predicting that mortgage rates won't sharply spike upward in the near future. NAR projects the 30-year fixed-rate mortgage to average 6.3% in the fourth quarter, rising to 6.5% by next spring, Yun said. The Mortgage Bankers Association also is projecting a modest rise through 2008.

"I think interest rates are going to remain close to where they are now, which is historically low," said Chris Cagan, director of research and analytics at First American Real Estate Solutions in Santa Ana, California. For perspective, remember that people thought an 8% rate was a deal in 2000, he said.

Nationally, home prices should increase slightly next year, according to NAR. The group figures that the national median existing-home price should increase about 1.4% for all of 2006 to $222,600 and increase another 1% next year to $224,700. The median new-home price is expected to drop 0.5% to $239,700 for 2006, and increase 0.8% to $241,700 in 2007.

Despite slower price gains, affordability could easily remain an issue, McIlwain said.
"Families that are already in the market have been able to roll appreciation over into other houses," he said. But for younger families and others who don't yet own homes, "it's becoming increasingly hard" to buy.

During the boom, some home buyers used exotic loans in order to keep monthly payments down and buy larger homes than they could otherwise afford — a trend that concerned some within the industry.

One future response to the affordability factor that McIlwain anticipates is the building of smaller houses. Young, new home buyers most likely won't take issue with a downsized domain, either, he said.

"They're interested in location, quality of design and materials, and will trade those for much smaller properties," he said.

Finally, as most real-estate professionals stress, there are definite financial rewards in real estate for those with a long-term plan — despite the valleys that inevitably pop up. People who intend to live in their homes for at least several years can weather most markets

"It's all long term," Campbell said. "You have dips in the stock market daily," she said, so those who own real estate should expect that they'll see dips in appreciation as well.
"If you're in over five years, you're going to be fine," she said.