Saturday, May 26, 2007

What is the state of the housing market?

There is an ongoing debate about the state of the housing market, with one side fiercely protesting that the so-called "housing recession" really "has a long way to go", and the other camp boldly insisting that housing will begin ticking up "any day now." I am more in the latter camp, and characterize the housing market as being in a mushy bottoming process that will likely begin to recover modestly "any month now."

We had some mixed data this past week, with new home sales up but existing home sales down, and prices lower for both. It is not so surprising that new home sales were stronger than existing home sales since the companies building new houses have no emotional "investment" to "get over" and are more than willing to simply cut prices to the level where they can "move the goods" since it is "nothing personal, just business" to them, whereas individual homeowners have a personal and emotional "investment" and simply don't have the skills and market research tools to "do the deal" in a prompt and efficient manner.

Mortgage rates are still quite low for "qualified" buyers, with Freddie Mac reporting in their latest weekly survey that the average rate for a 15-year fixed rate mortgage was 6.06%. That was up sharply from 5.92% the previous week, but is nonetheless still quite low and quite reasonable.

Mortgage applications have recently been trending up lately as well. Applications for both purchase and refinancing were both up modestly this past week, as were the four-week moving averages. Rest assured, we wouldn't be seeing these kinds of numbers if the housing market were "continuing to crumble."

As far as declining prices, while some people see this as a sign of "more troubles to come", I see it as a very good and healthy sign that the housing market is in fact "recovering" from the speculative excesses of recent years. It wouldn't surprise me at all to see median home prices decline another 5% to 10% or even 15% before prices stabilize and begin rising again, maybe a year from now.

The strongest statement I can and will make right now is that the January to April period probably marked the end of the worst of the housing downturn. Not that there might not be further declines in construction, sales, or prices, but simply that the majority of the declines are behind us. And when I speak of recovery, I don't mean a return to the "boom", but simply growth in units comparable to growth in demographics and the overall U.S. economy and eventually price growth no more than modestly higher than inflation. And I also do not mean a return to speculative buying or buying by people with horrible or even no credit profile, but simply a return to normal buying by normal buyers and with a healthy but not scandalous subprime market.

We also need to consider that each region of the country and each price range will have its own growth curve, so that we may see some weakness in some segements even as we see strength in others.

I wrote this post after reading part of an article in The New York Times by Abby Goodnough entitled "As Condos Rise in Florida, Investors Try to Flee" which seemed to go out of its way to try to paint as gloomy a picture as possible, regardless of the fact that this requried focusing on an area that may have been the epitome of the speculative excesses that we hopefully have now left behind us. The article was an interesting "story", but made no attempt to provide a balanced view of the overall housing market or even of a segment relevant to most readers of The Times. I don't particularly care for that style of yellow journalism.

-- Jack Krupansky

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