Angela May's Omaha Nebraska Real Estate Blog: October 2006

Encouraging news for sellers, but still a good time to buy. --Angela

The Worst May Be Over, Economists Say


On Oct. 7, after mortgage applications posted their largest weekly gain since June 2005, former Federal Reserve Chairman Alan Greenspan was quoted as saying, “The worst may well be over.”

A growing number of economists and analysts are beginning to see things his way.

"The point of maximum deterioration in housing activity has probably passed," says Jan Hatzius, chief U.S. economist at Goldman Sachs (GS), in an Oct. 20 report. "The sharp downturn of the past year seems to have brought total housing starts — single-family starts, multi-family starts, and mobile-home shipments — close to the level justified by the underlying demographics."

Peter Kretzmer, a senior economist at Bank of America (BAC), points to the University of Michigan's latest consumer-sentiment report, in which the share of respondents indicating that it was a good time to buy a house jumped to its highest level in 14 months.

Even the bears are slightly more circumspect. In an Oct. 20 note, Richard Berner, chief U.S. economist at Morgan Stanley, says the housing slowdown is far from over, but may not be as bad as everyone expected. "The latest data suggest that the intensity of the housing decline may be fading somewhat, and with it some of the concurrent downward pressure on housing prices," he said. "If so, one of the biggest perceived risks to the U.S. economy may be smaller than feared."

Source: Business Week Online, Marc Hogan (10/24/2006)

Great news for those of you thinking of buying a home!

Prices Coming Back to Earth, Economists Say

Nariman Behravesh, chief economist for Global Insight, an economic and financial information company, says home prices are “coming back to earth, coming down of their own weight.”

In a recent teleconference hosted by the National Association of Home Builders, he predicted that home prices could drop 5 percent nationally over the next year to a more regular level and that the housing slowdown's “spill over to the economy would be modest.”

That's similar to the recent outlook from David Lereah, chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

“Unlike previous housing slowdowns, which have come on the heels of broader economic weakness accompanied by job losses and rising interest rates, today’s slowdown comes amid an economy that continues to chug along at a respectable pace," he said in his October 2006 column in REALTOR® Magazine. "Continuing solid spending by consumers and businesses, steady government spending, a recovering stock market, and strong corporate profits are behind the steady growth.”

Orderly Retreat in Home Sales

“The key issue is whether the correction is orderly or disorderly. What I see is orderly,” says Mike Moran, chief economist for Daiwa Securities America Inc. “The press tries to portray this as a catastrophe and I don’t think that is the case. Certainly prices are high and need to be corrected, but it isn’t a desperate situation.”

Using a historic perspective, Moran says that prices actually are in line with the rate of appreciation in that we saw in 2003, which at the time was a record year for housing. The effect of flattening prices or declines in some markets has been “to squeeze out the exuberance that was in place in 2004 and 2005,” he notes.

The rapid adjustment in prices and modifications that builders are making in production could be signs that the correction might proceed faster than expected and “things could bottom out faster than you see in the numbers,” suggests Jim Glassman, managing director for JP Morgan Chase.

Still, all three back NAHB Chief Economist David Seiders’ assessment that the correction would continue through 2007, hitting bottom in mid-year. Hardest hit will be metros in the Northeast, Florida, and California, where home prices are overvalued by an average of 30 percent to 35 percent, Behravesh says, referring to a survey of housing prices in 300 metro areas that his company and National City Bank conduct quarterly.

Safety Nets

For the economy overall, Behravesh anticipates the gross domestic product growing 3.4 percent for this year and 2.2 percent next year.

Still, strong global economies, record corporate profits, a healthy stock market, falling interest rates, and strong exports were described as “safety nets” during the period of adjustment.

— By Camilla McLaughlin for REALTOR® Magazine Online

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NAR’s Pending Home Sales Index, based on contracts signed in August, rose 4.3 percent to a level of 110.1 from a reading of 105.6 in July, but is 14.1 percent lower than August 2005.

David Lereah, NAR’s chief economist, says the higher index reading is a hopeful sign for the real estate market.

“Our sense is that home sales may have reached a low in August,” he says. “The Pending Home Sales Index shows home sales should be fairly stable over the next two months, although a minor decline is possible.

Prices to Rise at Slower Pace in '07

"With fewer new listings coming on the market, we should be able to draw down the inventory supply early next year to the point where home prices will rise, but at a slower pace than historic norms,” Lereah adds.

The index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed and the transaction has not closed, but the sale usually is finalized within one or two months of signing.

An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined, and was the first of five consecutive record years for existing-home sales. There is a closer relationship between annual changes in the index and actual market performance than with month-to-month comparisons; analysis shows a strong parallel between changes in the index from a year ago and the actual pace of home sales in coming months.

Biggest Increase Is in the West

Regionally, the index reading for the West rose 9.2 percent in August to 112.7 but was 16.9 percent below August 2005.

The index in the South increased 4 percent to 126.8 in August but was 9.4 percent below a year ago.

In the Northeast, the index rose 3.6 percent in August to 95.4 but was 12.4 percent below August 2005.

The index in the Midwest was unchanged at 93.8 in August and was 20.4 percent lower than a year ago.

— REALTOR® Magazine Online