Back to NORMAL in 2007

Perspectives on Today's Housing Market from Mortgage Bankers.....

as seen in the December 2006 Today's Buyer's Rep Publication by Allen Alexander, Sales & Marketing Manager, Real Estate & Finance Division, Calculated Industries, Carson City, NV

• The 4th General Session on Economic and Housing Outlook was presented by two top economists: Doug Duncan, Ph D., who is the Chief Economist and Senior Vice President of Research and Business Development for the MBA; and Lyle Gramley, Ph D., a former Member of the Board of Governors of the Federal Reserve.

What did the experts say?

Duncan and Gramley shared their forecasts on the housing market with an emphasis, of course, on various issues linked to mortgage finance. Much of the data they presented painted a somber picture, including the following:

• Homes are now staying on the market for an average of 7 months and condos, averaging 8 months, are taking even longer to sell.
• Total mortgage production for 2006 is expected to decline by 19 percent to $2.46 trillion, compared to $3.03 trillion in 2005. Duncan's total production estimates are built on these assumptions:

1. New-home sales down by 18 percent, to just over 1 million units
2. Existing-home sales off by 9 percent, to 6.42 million
3. Purchases down by 8 percent
4. Refinances down by 29 percent

• The 2007 forecast isn't much brighter, with total mortgage production expected to decline another 14 percent to $2.13 trillion, driven by:

1. New-home sales down 8 percent, expected to dip under 1 million units
2. Existing-home sales projected to decline 8 percent, to 5.94 million
3. Purchases down 5 percent
4. Refinances down 25 percent

After these forecasts were delivered, you could have heard a pin drop in the room. Sensing the impact of his message Duncan reminded the audience that we need to consider both short- and long-term trends. These figures, he explained for perspective, closely mimic home sales in 2003-and at that time, 2003 marked the third consecutive year of record home sales.

He also reminded us that the word normalizing, used frequently during his presentation, specifically means that the housing market is returning to its long-term trend line. What we've experienced over the last several years has been extraordinary in terms of record low rates, record high price appreciation (particularly in certain coastal areas and other markets under speculative pressure), and looser underwriting guidelines. The MBA, the National Association of REALTORS (R), and others have said it wouldn't last. Now, even though it shouldn't come as any surprise to anybody, the tide has turned and the market has slowed.

This normalizing process could take over two years to fully work itself out, Duncan explained. However, it's also important to point out that he believes we're already more than a year into the adjustment period, which began during the summer of 2005, though it has been gaining momentum more recently.

Regarding existing-home sales, Duncan explained that sellers can be overly influenced by their preconceived expectations on price-they already have some vague, self-devised formula in their heads regarding what they bought their current home for, what they hope to sell it for, and what they plan to spend when they move on and up into their next home. Sellers are also vulnerable to what he termed the "smarter neighbor theory," meaning that their expectations are strongly influenced by earlier selling prices for neighboring homes and assumptions that "we can do even better." When this doesn't happen and the sellers aren't getting the offers they want, they often leave their property on the market for a long time or simply pull it off the market, creating, in either case, some degree of distortion in terms of the inventory of the marketable properties.

The situation in one market

"Next year will be really tough as sellers come to terms with the fact that this is not a minor blip in the real estate market that will magically change next spring. I believe that the normalization process will continue through most of 2007 and possibly longer. Though this may be a buyer's market, some buyers are actually having a hard time finding a home to purchase. As Mr. Duncan pointed out, the smarter neighbor theory has many sellers holding out for 2005, and even 2004 pricing expectations. They mistakenly think that if they are patient all good things will come."

The biggest challenge is helping sellers understand that buyers are interested and sincere. In fact, if you look at closed escrows and the ratio of asking price to closed price, the difference is amazingly small, demonstrating buyers' willingness to pay fair market for a home. "They will, however, shun any home that is overpriced, and I do mean shun," "No showings at all. No offers. And incentives have little attraction either. Priced right, buyers are happy to pass over such enticements, for the most part."

Like many other areas that have witnessed recent real estate run-ups, are apparently learning what much of the rest of the country already knows: Intelligently-priced homes will sell, and in most cases, sellers are receiving returns for ownership that would be quite pleasing in other times. However, recent 20 to 40 percent appreciation rates have made many sellers blind to a nice 5 to 8 percent annual increase. Again, it's all a matter of perspective. In the end, Morris believes seller reluctance to price for the current market is creating some serous issues and false expectations heading into spring of 2007.

"After all, even though buyers may have their eyes on prices now, your ability to help present a more complete and attractive financial picture, and long-term perspective, may be just what's needed to bring buyers and sellers back together-and back to normal."