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The NAR has been accused of denying the bubble to protect its members and their 6% commission, but the bullish attitude isn’t completely unsubstantiated. Sales of existing homes remained roughly flat from September, 2006, to yearend; from February to September, they declined 10%.
Total existing-home sales for 2006 reached 6.48 million, 8.4% lower than 2005 sales, but still the third-highest total on record after 2005 and 2004. Speculation drove sales up so much in the first half of the decade that that they were forced to adjust in 2006.
“The sky never did actually fall in 2006—or, to use that phrase that the media love, there were no ‘bubbles bursting,’" wrote NAR Chief Economist David Lereah in a January commentary. "But air did come out of some inflated balloons.”
In another recent display of relative strength, the NAR’s Pending Home Index, based on contracts for sales of existing homes signed in December, 2006, rose 4.9% that month, to 112.4, from an upwardly revised level of 107.2 in November. (An index of 100 equals the average level of contract activity during 2001, the first year to be examined and the first of five consecutive record years for existing-home sales.) The monthly gain was the biggest since March, 2004.
The NAR expects to see existing-home sales of 6.44 million by the end of 2007, and 6.64 million in 2008. The national median existing-home price should grow 1.9%, to $226,200, in 2007 after rising 1.1% in 2006, according to the association’s forecast.
Realtors aren’t the only ones optimistic about the housing market. The National Association of Home Builders is also predicting stabilization in 2007. Housing starts jumped 6.7% in November and 4.5% in December, according to the Census Bureau. NAHB Head of Research Gopal Ahluwalia has said starts will continue to pick up this year, backed by strong economic indicators like low interest rates and energy prices, and a high employment rate.
Has the market hit rock bottom? That may be stretching it—tops and bottoms can be identified only in retrospect. But the worst may be over. At the very least, the housing "bust" hasn’t been as devastating as many predicted.
Industry watchers keep wanting to call a bottom to the housing market’s decline. On Feb. 15 they pointed to a report showing improvement in the sentiment of homebuilders. The National Association of Realtors said prices fell in the fourth quarter in about half of the nation’s metro areas, but the Realtors’ ever-optimistic chief economist, David Lereah, said he suspects "the fourth quarter was the bottom of this current business cycle."
But then along came more evidence that housing is still suffering its own localized recession. On Feb. 16 the Census Bureau announced that construction starts on privately owned homes fell 14% in January, below even the lowest expectations. The annualized rate of construction was back to 1997 levels.
Eventually, the decline in construction will help dry up the inventory of unsold homes. But consider this: The number of empty houses for sale is at an all-time high. And loan givers are starting to tighten lending standards, especially in the subprime market.
That will force many marginal buyers out of the market. Some current owners who have to refinance could end up pushed into distress sales. Weakness in subprime is likely to filter through to the rest of the market.
"I believe the most apt description for the current trend is ‘suspended animation,’" wrote Liz Ann Sonders, chief investment strategist of Charles Schwab & Co., on Feb. 15.
Even if the housing market is near its nadir, what happens next? History isn’t encouraging. According to an analysis I did for a story last November (see BusinessWeek.com, 11/6/07, "Boom! Bust! Boom?"), housing markets that go bust can stay busted for a long while.
I looked at big metro areas that had housing booms over the past three decades. In about 15% of them, prices adjusted for inflation barely got back to their previous peaks even after 15 years. And in 45% or so of the markets, inflation-adjusted prices were still down a decade and a half after their pre-bust peaks.
So, when housing does hit bottom, it’s likely to climb back very slowly. One. Inch. At a time.
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