Housing Crunch - Has Downturn Bottomed Out? Or is there More Pain to Come?

An interesting housing feature article has just appeared in USA Today - by Barbara Hagenbaugh.

This showed deep division amongst expert analysts as to whether the worst of the housing market downturn is over or whether there is a lot more pain to come.  A survey of 55 economists apparently showed that only 9 percent believe that the housing decline ended in 2006.  Forty-two percent of those surveyed said the downturn will end sometime in the first half of 2007 and 45-percent said housing will not bottom until the second half of the year.

Chief financial economist at Bank of Tokyo-Mitsubishi, Christopher Rupkey, estimates that the downturn ended last year and wonders "why people are so pessimistic". 

This question is clearly important, not only for homesellers and prospective homebuyers but also for those involved in the residential real estate industry who are dependent upon an active, vibrant or at the very least a stable market.

According to the National Association of Realtors, sales of pre-owned homes fell 8.2 percent in 2006, showing the biggest drop in 17-years,  But the US economy grew at a faster pace in 2006 than in 2005.  This to me shows that consumers have not been worried about a 'housing slump'.  I think that buyers have been, correctly, simply holding back for anticipated market corrections following a period of insane year-on-year price increases at a level which could not realistically be sustained in the short term. 

Also, when inventories of unsold new homes are back in balance - and builders right now are providing great incentives for buyers of new-homes as well as delaying starts on previously planned projects - then there very likely will be a great rush back into new-home buying.  In South Florida, for example, home rentals are at a premium and often difficult to find.  Numbers of people moving into Florida also continues unabated, even though this net migration in terms of homebuying is mitigated somewhat by negative insurance and taxation issues which the new governor Charlie Christ together with the Florida legislature in Tallahassee are slating some important measures to get these difficulties under control.

According to NAR's seasonally-adjusted index of pending home-sales, the national home-sales index rose in December 2006 at the fasted pace since March 2004.  It also showed that the level of unsold homes on the US home market appeared to have peaked in July 2006.

Still, there are naysayers.

Wachovia senior economist Mark Vintner says that although recent housing data have been upbeat "they have been skewed by warmer than usual weather".  He says that brought out a few more buyers and allowed for more building in the northeast, pulling sales forward.  "Come Spring, housing activity will be slower than normal".  He also says that he hasn't met a homebuilder who thinks that things have bottomed out.

According to the USA Today Report, economist Tucker Hart Adams says that the housing market won't stabilize in 2007.  The combination of resetting ARMs, homeowners unable to keep up with payments on so-called exotic mortgages such as interest-only loans, and other debt will lead to higher foreclosure rates and more homes on the market.  "It is really optimistic to think that it just took a little adjustment and everything is fine", he says.

Why should interest-only borrowers, paying comfortably less on their mortgage monthly repayments than they otherwise would, e.g on fully-amortized mortgage alternatives, be currently hurting and be inexorably headed towards foreclosure?  The potential for this kind of scenario exists when those borrowers with five or seven or ten-year interest-only loan periods have to contemplate higher principal-included repayments (at least those who have not yet re-sold or re-mortgaged).  There are of course significantly more pending foreclosures right now than is historically usual.  There may, however, be pretty diverse reasons for this current situation and I can think of some myself which have nothing to do with interest-only loan repayments. A clearly improving housing market turnabout would, I'm certain, make serious inroads into existing pre-foreclosure numbers, many of which will never be foreclosed anyhow and are simply at some preliminary point in that process.  There is also a large difference between handing back to the bank an asset steadily increasing in value, or at least maintaining value, and handing back one that is perceived as losing value on a monthly basis.

The housing market will undoubtedly be on the way to recovery by mid to late 2008.  The pent-up demand from those presently renting has also got to be huge. There will be a need for more housing, not less and that is NOT going to change.  The present market may arguably to some extent at least still be at a position of 'pause' or 're-structuring' but anyone who bets against a full and healthy housing recovery is on a loser. Many South Florida investors may indeed have drifted away from the vacation and second-home market but in my opinion they are also leaving a ton of value behind, there for the picking by the canny or astute who recognize the short-term nature of recent and current negatives in the residential and second-home investment property market.

It may also make sense for many existing homesellers to simply take their homes off the market.  Why sell in a buyer's market unless there is an absolutely need to do so?  This would also reduce existing sales inventory of pre-owned homes and help to bring a quicker adjustment and stability to re-sale home market conditions.  In my own opinion, this may also be a very good time to purchase residential real estate!

My observations, opinions and comments stem mainly from a South Florida residential real estate perspective.  However, fellow real estate industry professional impressions on this subject broadly and also as to what's happening in their local market areas would be most welcome.  The very same, it goes without saying, from homeowners selling or contemplating home sales or homebuyer prospects considering buying a home now or at any time in the future. 

Andy Dee