An Old Year of Contraction; A New Year of Stability

by David Lereah, Chief Economist

We begin the New Year with a hint of optimism. The glass was half empty in 2006 - home sales fell

throughout the year. But the glass looks to be half full in 2007. While property speculation has ceased, signs

of a return to home buying have surfaced and inventory levels have topped out. REALTORS® and lenders

a like are encouraged, but guarded, about 2007.

Last year was a year of contraction, a correction that was sorely needed after five years of a booming

housing market expansion. Home prices were inflated and property investors (and speculators) were

everywhere at the end of 2005. That set the stage for 2006 to spiral downward. Home buyers stayed on

the sidelines because they could not afford the lofty-priced homes in the boom-inflicted regions. Some

households also postponed buying because they believed prices would eventually drop, making them better

off buying later rather than now. Property speculators fled, dumping inventories. Meanwhile, homeowners

looking to sell sat stubbornly tied to their listing prices.

Let's be clear, though. The sky never did actually fall in 2006- or, to use that phrase that the media love,

there were no "bubbles" bursting. But air did come out of some inflated balloons. According to our National

Association of REALTORS® latest estimates for last year, existing home sales were down 8.2 percent from

a year earlier. Similarly, new home sales were down 17.4 percent and housing starts were down 12.5

percent. Our nation's housing sector suffered a contraction, inhibiting over all GDP growth.

But 2007 is a new year and with it brings a cautious confidence and hopefulness. Home sales appear to

have bottomed out, having reached a cyclical low in September of last year. And in recent months, home

sales are inching up, not down. Existing home sales experienced two consecutive monthly, albeit modest,

gains from September to November. Inventories have stabilized, with the nation's months' supply hovering

around 7.3 months since July of last year.

What all this means is that potential home buyers have amore favorable backdrop for buying today. It is

now a buyers market. Sellers are more flexible now, reducing prices and/or paying part of the closing costs.

High inventories are now a positive rather than a negative for property buyers. Rising inventories in 2006

reflected a deteriorating market place, keeping buyers on the sidelines. Stable inventories in 2007 represent

more choices for buyers. Mortgage rates continue to hover near cyclical lows, keeping financing costs low.

And depending on where you live, affordability conditions are most likely improving. Wages (income) are

registering healthy rates of growth, while home price growth is flat or down, broadening a household's

financial capacity to purchase property.

Yes, housing was bed-ridden at the end of last year. Existing home sales hit bottom during the fourth quarter

of 2006. But after a frenzied five-year real estate boom, a reasonable prescription for our nation's housing

sector is regular rest and a healthy regimen of exercise. I expect housing to get back on its feet in 2007. Our

forecast calls for modest quarterly gains throughout this year, but year-over-year, home sales are expected

to fall by a modest 1.2 percent. New home sales are not expected to rebound until the third quarter of this

year so year-over-year sales are expected to fall by a larger 9.7 percent.

Looking back, 2006 was a year of contraction. But looking forward, 2007 will represent a year of stability.

Cheers to the New Year. Home buyers have a more favorable backdrop for buying today. It is now a

buyers market.