"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 . . .
Mortgage Rates Rising
From 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
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.
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
Housing Market Shows Further Signs of Cooling
JAMES R. HAGERTY and RUTH SIMON
THE WALL STREET JOURNAL, November 15, 2005; Page A1
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
THE WALL STREET JOURNAL, November 15, 2005; Page D1