Seeking Alpha
, Iacono Research (183 clicks)
Newsletter provider, portfolio strategy, macro, gold
Profile| Send Message|
( followers)  
It really doesn't take much gray matter to understand two very important facts about the nation's housing market and what these facts imply about its prospects in the years ahead.

The first fact is that housing has peaked, the second is that housing cycles are very long. The simple conclusion that can be reached as a result of these two truisms?

It will likely be years until home prices exceed their 2005 highs.

A few outlets in the mainstream media seem to be putting two and two together (actually, one and one in this case). In the local paper here in Ventura County, after it was announced that the median home price had dipped more than eight percent from year ago levels, the local paper had a story with the following quote from some of the locals.

Several real estate appraisers, however, said the rebound will take five to eight years, based on historic patterns.

"I'm not sure that we've bottomed out yet," said Lindsay Nielson, a Ventura-based appraiser for more than 40 years. "We're certainly in the trough right now."

This prediction was not prominently displayed in the report, but it's a first step.

This is probably happening in many parts of the country where, now that the frenzy is over, people are taking a deep breath and looking back at previous housing booms and projecting the aftermath into the immediate future.

Pretty simple stuff, actually. Not pleasant for many people, but simple.

BusinessWeek is the latest entrant to the group of housing realists. In their "Where to Invest in 2007" year-end double-issue, they have a number of articles detailing what to expect for the housing market in the new year.

The collection of reports is notable in that they are overwhelmingly negative. Not just a little down on the formerly hot sector, but projecting a housing malaise that is now just in its infancy - one that will continue at least through the rest of the decade.

Here's a partial list of predictions for 2007:

Las Vegas
2006 Median Home Price: $324,000
2007 Median Home Price: $292,000
1-yr Change: -9.9%

2006 Median Home Price: $329,000
2007 Median Home Price: $300,000
1-yr Change: -8.8%

Los Angeles

2006 Median Home Price: $534,000
2007 Median Home Price: $492,000
1-yr Change: -7.9%

Home prices in most cities are predicted to rise modestly, but in the bubbliest areas, the prognosis is not good.

The individual reports fill in the details on the near-term forecast, hungry realtors who may not be looking out for their buyer's interest, the long-term forecast, and much more.

How Bad Will the 2007 Property Market Be?

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, 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.

A mainstream media outlet floating the idea of giving up on real estate in 2007 before it has even started, and maybe 2008 as well? That's quite a revelation from such a prominent publication.

And that realtor who you think is working on your behalf? Think again.

Home Buyer, Beware

Ever wonder why a real estate agent seems to be steering you toward a certain house? The agent just might be in line for a jumbo commission or bonus from the owner if he or she manages to sell you that particular property. As the housing market continues to soften, some desperate sellers are offering outsize incentives to influence buyers' agents.

While the typical commission for a broker who works with a buyer is 2% or 3%, outsize commissions are becoming more common. There are 10% commissions on luxury condos in Miami and even a 20% commission on a house in Atlanta. The result can be a strong financial incentive to push a certain home.
Advice to consumers: Start with the assumption that the nice person showing you around is not your ally. Ask up front how much the person would be compensated if you bought a place. If possible, sign a buyer-broker agreement before you start looking at houses.

This is some straight talk that is worth listening to if you're thinking of buying property. You really have to wonder about the whole real estate sales business these days. A few years back listings were dear and buyers were plentiful - today the opposite is true. What poor advice desperate and unscrupulous agents would provide to sellers is completely different, and much less harmful, than that which they may provide to buyers.

This next one was the story that really stood out - 15 years until the next peak?

Housing: Curb Your Enthusiasm About A Recovery

Home prices still have room to decline, and it may take 15 years or more to reach new inflation-adjusted highs

Housing booms are short and exciting. Housing busts, on the other hand, are long and painful. So don't put much faith in those oft-heard assertions that the worst is already over. Prices are likely to fall further in many markets in 2007. In some others, prices may rise, but at less than the rate of inflation. A BusinessWeek analysis of the past three decades shows that if history repeats itself, it's likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.
Advice to homeowners: If you need to sell and you're not getting much interest, cut the price by an extreme amount. If you make halfhearted cuts, you'll remain overpriced and you'll follow the market all the way to the bottom.

That sounds just like early 1990s California - be stubborn with your asking price and you can ride prices all the way down over a period of years.

The only story that provided any real hope for the near-term future of the bubble markets was at the bottom of the list and carries a titlle best characterized as "tentative".

Boom! Bust! Boom?

Housing has gone from a sure thing to a complete muddle. Median prices fell nationwide for a second straight month in September, the first time that has happened since 1990, according to a report on Oct. 25. Homeowners don't know whether to sit tight or bail. They have no idea whether they're experiencing the beginnings of a deep bust that will leave a permanent hole in their wealth, or a small hiccup.
With apologies to the mainstream, the truth is that supply considerations can cause markets to diverge from what seem to be the fundamentals for a long time, perhaps permanently. One explanation for this is the "superstar cities" concept developed by economists Joseph E. Gyourko and Todd M. Sinai of the University of Pennsylvania's Wharton School and Christopher J. Mayer of Columbia Business School. They argue that certain cities -- Boston and San Francisco, say -- benefit from a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there.

It's funny that the writer apologizes before introducing the housing perma-bull creator of the superstar-cities theory - none other than Chris Mayer. This idea was scrutinized here more than a year ago in the memorable post Money Magazine Does a One-Eighty.

Notably absent throughout the stories are quotes from either National Association of Realtors Chief Economist David Lereah or former Fed Chief Alan Greenspan.

Times sure have changed.

Source: Housing Realism Enters the Mainstream Media