Economy: What direction will housing take?

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net

With the turmoil on Wall Street, a declining housing industry and the forecasts of doom and gloom, etc., one has to wonder when or if we will ever get back to the ways things were?

It's a question I'm often asked and my answer (for many years and through various cycles, downturns and upswings alike) is never. We never get back to the way things were.

As we move through the cycles, changes, etc., good times and bad, we adapt, adjust and somehow manage over time to get back to a place that resembles the place we were, but it's never really the same. While mistakes will manifest themselves with different tags or monikers, "The S&L Crisis", "various housing recessions" or "energy crunches", through the years the problems in the economy, housing and employment have been similar.

"Bad news sells" and if you listen to the media, you're going to be disappointed.  The media exploits the negative aspects to grab our attention, while promoting the products of their advertisers. Good news isn't a story, it doesn't sell airtime and the sound bites don't keep you glued to the set.

There will be a lot of talk about mortgage and housing stocks and nervous investors will sell (advised by the same brokers that make commissions from those sales). Take a look at Manhattan condo market (where those same brokers live). Is it declining like other real estate or in demand by those same brokers?

Are there problems in the economy? Absolutely, there always is. The same mortgage and housing industry that grew at breakneck speed is now contracting or correcting. No down mortgages (which never made sense) are history and we're back to requiring that buyers have equity in the deal, imagine that concept. 

So where to from here?

The first step is primary research. Track the indicators, compare them to historical numbers and ratios (during normal times) and get some perspective on where we are vs. where we've been and ideally, where we should be.

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There's a direct and constant relationship between population, employment and housing when the market is at or near balance. From 2003-2005, those relationships were out of balance and now we're seeing the correction.

Selected US Housing and Mortgage Statistics

• 2006 – Total US Housing Units = 126,221,886
• 65% of all homeowners have mortgages = 82,044,226
• 76% of all mortgages are fixed rate = 62,353,612
• 14% of all mortgages are sub-prime = 11,486,192
• Sub-prime ARM's are 8% of total mortgages = 6,563,538
• 15% of the sub-prime loans are delinquent or about 1,722,929+/- or about 2% of all mortgages.
• Historically, foreclosures average 1% of the housing inventory 1,262,219+/-
• Seasonally adjusted housing starts for 2007 are estimated to be down 17% from 2006.

Basic housing economics:

• Population growth equals demand for housing.
• Employment provides the ability to purchase housing.
• Credit (mortgage loans) combined with interest rates (lowering them) increases leverage and makes housing affordable.
• Housing prices and interest rates determine the ability to purchase.

Facts:

• In 2008 we will elect new leadership including a new president, the members of the house and the majority of the senate. The pressure will be on the incumbents to right the housing economy. 
• What will sellers do with prices? If they continue to lower them, what impact will it have?
• If the FRB lowers rates (pressure from weak retails sales and election year politics will play a role in this) how far will they drop and what will the impact be?
• Foreclosures will impact the market, increasing inventory and in turn lowering prices. How much will this impact the market?
• The FED's will create bailout programs (loan restructuring, etc.) to assist homeowners with ARM's that are about to index up in late 2007 and early 2008. What impact will this have?

Perspective:

The US population continues to grow and the economy continues to expand, even at a modest pace. Interest rates are steady (and likely will decrease). Combined with lower prices, housing will be more affordable in the coming months.

People need a place to live and election year politics will do everything possible to insure they get the American Dream. Its simply a matter of how much time it will take for all of these factors to work their way through the economy.

So how long will it take to correct the market? Under current conditions most experts are thinking 18 months to two years. However if one or more of the variables change even slightly (and they seem poised to do so), it could correct at a more accelerated pace.   

Tight credit will likely remain as the secondary market focuses on borrowers with the ability to pay and the exotic loans programs of the past will remain in the past. The FRB will be watching all of this play out and will slowly move rates until they have the desired impact.

We'll be setting new records in housing, mortgages and related areas, just as we did in 2003-2005, simply in the opposite direction. Housing won't be the ATM machine it was (and never should have been). We'll have to start thinking of housing as a longer-term investment rather then a "share of hot stock" that can be purchased and resold over-night for a profit.

We’re going through a correction and the FRB will want to avoid, over-correcting the economy. After all, it was the FRB's "over correction" of interest rates several years ago that got us to this point. Don't expect Bernanke to repeat Greenspan's mistake of lowing rates too far, too soon, before the impact to the economy can be measured. 

AUTHOR: Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net