How bad will the 2007 housing market
be?
Economists predict that next year will be tough, but say some metro areas
will hold up nicely and the future may not be as gloomy as some fear.
Americans are increasingly nervous about the real estate market in 2007.
They have good reason to be. But the news isn't all bad: Interest rates
will remain at historically low levels, homebuyers will see more
opportunities, and, best of all, for those planning for the long term,
2009 could be primed for a comeback.
To
gauge what the next 12 months might look like, though, BusinessWeek.com
asked economists at leading real estate research firms to provide their
outlooks for the housing market in 2007. The less-than-festive consensus:
Home prices will continue to fall in some markets, and the rate of price
appreciation will slow in most places. Declines in homes sales, which
directly influence price trends, will set the stage for another year of
price decreases in 2008. Foreclosures will continue to increase. For those
struggling to hold onto their homes, their net worth will shrink as these
homes lose value. Long-term mortgage rates will rise. Housing starts will
see double-digit depreciation, the sharpest decline since 1991, the worst
year for housing starts on record.
Grim
as that might sound, there are some bright spots. Nationwide, home prices
will be flat to up slightly in 2007, with many large markets seeing small
increases. While new home sales will be down for the year, existing home
sales will also be flat. And housing starts won't see as sharp a decline
as they did in the early '90s or early '80s.
Self-cleaning market
Another reason for optimism (keeping in mind that expectations are
somewhat lower this year): For many, the ongoing market correction will
make the dream of buying a home a reality.
"In
so many of these markets, housing became extremely unaffordable," says
David Stiff, chief economist at financial data processor Fiserv Lending
Solutions, who expects average U.S. home prices to appreciate only 0.1%
overall in 2007. "Prices moving back in line with household income sets
the stage for price appreciation in the future."
Blame
the rapid run-up in prices on speculation. Taking advantage of low
interest rates and good economic conditions, investors drove prices to new
heights in the first half of the decade, so they could flip purchases for
profit. Some markets saw price appreciation rates of as much as 50%,
versus the average annual rate of about 10%.
But
as interest rates rose and the gap between income and housing costs
widened, homebuyers never materialized as expected. Investors have now
been forced to dump their property on the market, flooding many places
with homes for sale and forcing prices to a more realistic level.
Time
lag
"The
market was in a frenzy in 2005," says Lawrence Yun, senior economist at
the National Association of Realtors (NAR). "The current transition is
just cleansing away the speculators." Yun expects existing home sales to
slip just 0.6% in 2007, with a pickup in the fourth quarter continuing
into 2008.
Home
price trends tend to lag nine to 12 months behind sales trends, according
to Stiff, who predicts prices will be weakest in 2008 and rebound in 2009.
The
researchers at Fiserv arrive at their price forecasts by first estimating
what home prices would be if housing supply and demand were in balance --
that is, if price levels were consistent with local demographic trends and
household income levels. They then look at the difference between the
estimated "equilibrium" price and the actual price level. If prices are
too high relative to the affordable equilibrium level, the forecast is
weaker price appreciation. If prices are much higher than equilibrium, the
model forecasts price declines.
Construction diet
This
explains why former red-hot markets like Southern California, Florida and
Las Vegas, which saw the most rapid run-up in prices between 2001 and
2005, will see the sharpest declines in prices in 2007, according to home
price index data from Fiserv and Moody's. The Miami area, with an
estimated decline of 9.16%, will have the second-worst 2007 price drop out
of all the country's metro areas. Las Vegas comes in third-worst overall,
with a 9.15% forecast decline, and Los Angeles, with a 7.1% decline, isn't
too far behind.
Texas
didn't experience dramatic price appreciation until more recently.
Consequently, the Dallas and Houston metro areas are expected to have 2007
price increases of 4% and 3.3%, respectively.
Since
trends in housing starts echo price movement, it goes without saying that
new home construction is headed for a major slump in 2007. Nationally,
total housing starts will slide 13.2% to 1.576 million, according to the
National Association of Home Builders (NAHB) in Washington, D.C. The last
time the nation saw a downturn of this magnitude was in 1991, when starts
dropped 15% year-over-year.
"It
isn't as bad, but it's a very big decline, and one of the big reasons is
because of all the investors and speculators," says Gopal Ahluwalia, vice
president of research at the NAHB. In the fourth quarter, the seasonally
adjusted annual rate will pick up to 1.635 million. At this point, the
surplus in inventory will be gone, and prices will start to stabilize,
Ahluwalia adds.
Looking for value
As
with prices and sales, trends in new home construction can vary
dramatically from market to market. Housing starts in the Detroit area
will be among the lowest in the country in 2007, plummeting 18.3% due to
continuing economic woes. Interestingly, prices will not decline, but this
is largely because they cannot go any lower (Read more about Detroit's
market in "The
foreclosure capital of the U.S."). Seattle is the only area that will
see a rise (4.7%) in housing starts, primarily because of a strong job
market with companies like Microsoft and Boeing based in the area.
Ironically, even record-low new home construction numbers can be
interpreted as good news for the overall housing market. With fewer homes
being built, the market will be forced to absorb its current oversupply,
bringing about the supply-demand balance that, once again, leads to more
realistic prices. (Read more in "How
buyers could save the housing market." )
"It's
important to note that the value of homes isn't dropping," says Santo
Rizzo, chief executive officer of Rizzo Realty Group, a national real
estate investment firm in Chicago.
The
normalizing market is causing "unnecessary fear" and creating a favorable
market for real estate investors, says Rizzo, who recommends investing for
the long term in 2007 "losers" Orlando, Fla., Phoenix and Las Vegas for
their stable economies, high resale marketability, vacation market
statuses, low vacancy rates and favorable price-to-income ratios.
Brighter tomorrows?
Interest rates are, of course, the wild card here. The Mortgage Bankers
Association of America expects the Federal Funds Rate -- the interest rate
on overnight loans between banks -- to remain at 5.3% throughout 2007,
with the average 30-year fixed mortgage rate climbing to 6.6%, from 6%,
and the one-year adjustable mortgage rate average staying about the same
at 5.8%. According to the NAR, the Fed Funds Rate will fall to 4.8% by the
end of 2007, the 30-year fixed rate will hit 6.7%, and the one-year
adjustable rate will decline to 5.5%.
But
no matter how you spin it, interest and mortgage rates are and will remain
at historically low levels. The rest of the economy isn't in terrible
shape, either -- the unemployment rate hovers around a relatively low 5%,
and the stock market is in the midst of an encouraging rally.
"The
law of supply and demand, more than anything, is going to be the driving
force that keeps the market relatively 'flat,' throughout the year," says
Rizzo. "Since we expect the economy to continue to improve, rents to
continue to rise, interest rates to remain relatively low and investor
supplies to be absorbed, the 2007 'flat' market will set the stage for
brighter predictions in 2008."
So
while 2007 won't be an outstanding year for real estate, it's unlikely to
go down in history as one of the worst. At the very least, it will create
an investment opportunity -- and a great lesson in basic economics.
Table: Not-so-great expectations for 2007
|
City |
2006
median home price |
2007
median home price (est.) |
1-year
change |
|
Las Vegas |
$324,000 |
$292,000 |
-9.9% |
|
Miami |
$329,000 |
$300,000 |
-8.8% |
|
Los Angeles |
$534,000 |
$492,000 |
-7.9% |
|
Washington, D.C. |
$421,000 |
$401,000 |
-4.8% |
|
New York |
$456,000 |
$442,000 |
-3.1% |
|
Boston |
$378,000 |
$371,000 |
-1.9% |
|
Detroit |
$115,000 |
$115,000 |
None |
|
San Francisco |
$846,000 |
$847,000 |
0.1% |
|
Philadelphia |
$226,000 |
$228,000 |
0.9% |
|
Seattle |
$385,000 |
$399,000 |
3.6% |
|
Chicago |
$278,000 |
$289,000 |
4% |
|
Atlanta |
$189,000 |
$197,000 |
4.2% |
|
Houston |
$153,000 |
$162,000 |
5.9% |
|
Dallas |
$154,000 |
$164,000 |
6.5% |
|
Entire
U.S. |
$223,700 |
$227,500 |
1.70% |
Median price data from Fiserv Lending Solutions and the National
Association of Realtors.
