WSJ: Housing Market Shows Further Signs of Cooling

"We believe the market has peaked."

So says Doug Duncan, the Mortgage Bankers Association’s chief economist, referring to the expected record 8.3 million new and existing home sales in 2005. Thats up up 4% from 2004, but Duncan’s projections are for the record setting four-year streak of
higher prices to end next year with a sales decline of 3.5%.

We noted back in August that Real Estate had begun to Cool. This front page WSJ article, while significant, may even be understating how rapidly a cooling could occur. I suspect that Duncan’s estimate may be accurate for Q1 or even the first half of 2006, but if the slowdown accelerates, we could see the drop become even more dramatic. And, if rates go appreciably higher and/or GDP decellerates even more rapidly, a 5-7% drop is quite possible (in the first year). The next recession could see home purchases (initial) drop of 10%.

Here’s the WSJ Ubiq-cerpt:™

"The pace of U.S. home sales is showing further signs of slowing, amid a widening gap between sellers’ asking prices and the amount skittish buyers are prepared to offer, according to an industry survey, real-estate brokerage firms and housing economists.

Rising mortgage rates, higher energy costs, widespread talk about the risk of a "bubble" in housing and a surge in the number of homes on the market are among the factors behind the apparent slowdown. They have combined to make home shoppers more cautious, economists and real-estate brokers say. Buyers are taking their time to look for bargains, while many sellers have put unrealistically high price tags on their homes. That leads to a standoff, causing the number of sales to drop — a classic ending to a period of unusually rapid house-price increases.

In a survey conducted last week, real-estate consulting firm Real Trends found that the number of home-purchase contracts signed last month dropped 8% from a year earlier at 48 of the nation’s large real-estate brokerage firms. Those brokers responded to an email poll sent to 80 brokerage firms . . .

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Mortgage Rates Rising

Wsj_mortg_20051114194410From a trader/equity investor perspective, there is a fascinating quote in the column that offers up great insight.  Consider the Psychology of Markets and how sentiment impacts behavior

"The [house-buying] frenzy is over," says Steve Murray, president of
Real Trends, Littleton, Colo. Mr. Murray says it may take six to eight
months before sellers accept that the market has softened and reduce
their asking prices. He said some of the brokers surveyed were
surprised at how rapidly the market seemed to be cooling in recent
weeks.

That’s quite the parallel to what occurs when stock markets suffer rapid price decrease: sellers have a very hard time accepting the new reality, and take quite a while to become intellectually and emotionally comfortable with lower prices. In other words, they do not sell as markets crash, until way late in the process.

Do not get the idea its all doom and gloom as to home sales. The Journal notes that "home sales remain strong by historical standards, and
prices in most of the country are at or near records." But the Real Estate  market is no longer in the "boom phase" that saw prices move up more than 50% over the past five years, and in the frothy coastal urban markets, more than double.

Quoth David
Lereah, chief economist for the National Association of Realtors as saying, "The air is coming out of the balloons."

The key macro impact will be the end of the home equity extraction as a source of consumer
spending. The $2 trillion housing market has been the primary driver of economic activity in the US. It accounts for "one-third of
households’ net worth."

The Journal points out that "there hasn’t been a sustained drop in housing
prices in any major part of the U.S. in a decade or more, and housing
has become a vital barometer for the financial, retail and homebuilding
industries."

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Sources:
Housing Market Shows Further Signs of Cooling
JAMES R. HAGERTY and RUTH SIMON
THE WALL STREET JOURNAL, November 15, 2005; Page A1
http://online.wsj.com/article/SB113201604826197047.html

One of the Last Deals On Mortgages Fades
As Rates On 30-Year Fixed Loans Hit 6.5%, Some Borrowers Race to Lock In Terms
RUTH SIMON
THE WALL STREET JOURNAL, November 15, 2005; Page D1
http://online.wsj.com/article/SB113201604826197047.html

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What's been said:

Discussions found on the web:
  1. mh497 commented on Nov 15

    “The next recession could see home purchases drop 10%.”

    Is that really what you think, or did you want to go more and decided to pull back to sound sane?

    We’re way extended, it seems like a 15% drop could easily happen in a recession.

  2. Blackwood commented on Nov 15

    It’s herd mentality. Why have condos gone up? Every frigging baby boomer in the US read magazine articles advising them to buy a condo to rent out as an investment that they could sell after they retire.

    And so Las Vegas has huge tracts of empty condos, bought by out of town baby boomers as a retirement investment, all of which remain empty. And having bought all at the same time, when the baby boom all retires and sells at the same time, what do you suppose will happen?

    Well, economists have been predicting the stock market crash as the baby boom cashes out in 2010-2015 for 20 years now. Maybe it’s good that they’ve been deflected into crashing the real estate market instead.

  3. calmo commented on Nov 15

    10% would mean that the housing balloon was really only in the works for the last 8 months (the last offical annual increase in home resales was 15%).
    So this number, 10%, is more massaging by the industry.
    When it’s full boom on the ground, they can market lots on the moon; when the boom has crested, it is only a local and transitory phase; when the boom is over, it is a temporary respite (like that well worn parrot) and an immediate resumption is almost immediate; when it is declining, it has bottomed and this is an entry point; when it is nearly worthless, it is an impossibly attractive speculative buy.
    The role of RE agents/listings in a cresting market on house prices interests me. If I am a California agent with few listings for sale, do I encourage the seller to drop the price now and take an early commission rather than wait several months for an even lower commission? If I have tons of listings, that pressure seems less, no?

  4. Barry Ritholtz commented on Nov 15

    The chief economist of the Mortgage Bankers Association was referring to 2006, and my comments were made in response to him (also referring to 2006).

    I have since clarified my original post (in parens) to refer to 2006:

    And, if rates go appreciably higher and/or GDP decellerates even more rapidly, a 5-7% drop is quite possible (in the first year). The next recession could see home purchases (initial) drop of 10%.

    I hope this explains it a little better.

  5. brian commented on Nov 15

    Barry, clarify if I am wrong, but my assumption was that when real estate bulls say that the housing market isn’t in trouble, just that it takes longer for houses to sell, it is equivalent to stock traders on the ask side holding out for higher prices even as stock traders on the bid side removing their bids, thus increasing the spread between the bid-ask.

  6. critical thought commented on Nov 15

    ok. . .

    so, I’m definitely into the whole real estate bubble thing. I agree with it. It makes sense.

    In fact, I convinced my wife to move from an apartment we own, to a place that we are renting. (there are other reasons too, we will be moving within 5 years, and couldn’t stay in our current place).

    so. . .I really hope this bubble thing proves out

  7. Lillian commented on Oct 26

    The Housing market is in trouble for all those bad loan they sold. Their greed. I am glad it hurting them now. How they hurt us with their bad Loan and the Banking Department I feel is part of all this. Lillian

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