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With homebuilders becoming more aggressive in cutting prices of new homes, those selling existing homes are coming under increasing pressure to do the same. In light of current elevated inventory levels, the national aggregate median home price is forecast to decline 1.3 percent in 2007. Lower home prices have lifted housing affordability compared to year-ago levels. That is good news, since it can bring more buyers to the market. However, declining home prices can also cut into buyer confidence. Buyers may think twice if they believe further price cuts are over the horizon. Which will it be? Falling prices begetting more sales or less sales?
The Price is Right for Buyers
Let’s look at the short term. Buyers could continue to hold back. But the powerful forces of wealth accumulation, income gains, and job additions – plus rising apartment rents – in light of declining home prices will inevitably raise home purchase demand. New home prices fell by 10.9 percent in April from a year earlier. Falling prices evidently helped to spur new-home sales.
New home sales rose to a 981,000-unit annualized sales pace (seasonally adjusted) in April from their 844,000 annualized pace in March. (New home sales data produced by the Census is known for very large revisions, so we have to wait as to how much reliance to place on the robust sale increase). Higher sales modestly lowered the number of new homes on the market for sale to 538,000.The new home inventory had peaked at 573,000 nine months earlier. Inventory is further expected to decline because builders have been highly disciplined in lowering production.
Single-family housing starts were 33% lower in the first quarter than a year ago. Single-family housing permits -- a leading indicator for starts – hit their lowest mark in nearly a decade. The thinning-out of inventory will be critical in determining how fast the market returns to healthy supply-demand conditions.
Because new homes in general compete against existing homes, a fall in new home prices will force existing home sellers to concede on prices. Unlike the effect on new homes, falling prices on existing homes, however, have not lifted demand. April sales were soft at a 5.99 million-unit annualized sales pace (seasonally adjusted), the lowest in nearly four years. NAR’s Pending
Home Sales Index points to continued soft sales for May and June.
Real Estate is a Long-Term Investment
But let’s have a reality check. A projected price decline of 1.3 percent for most homeowners does not have that much of an impact considering that home prices had risen better than 50 percent during the boom. So those home buyers who have been in it for the long haul should be all fine. Furthermore, any loss in home value will be quickly erased next year as prices are forecast to rise by close to 2 percent in 2008.
The reversal in home prices from negative territory in 2007 to positive territory in 2008 will happen as sales pick up. New job additions of 4.5 million over the next two years will translate into $1.3 trillion in added personal income for the country. Record corporate profits have yielded a record high stock market and record high household wealth. Yet, home sales have been falling despite fairly stable mortgage rates. That does not make too much sense.
What does make sense is that there shouldn’t be any more surprises from the subprime mortgage quarter. All the negative shocks from the sub-prime industry fallout are already out. Yes, there will be higher delinquencies and foreclosures, but those are expected. We do not foresee further unexpected negative news from the sub-prime market. The Wall Street “sugar daddies” of the sub-prime funds are now well aware of the consequences of sloppy underwriting. Lending to people who cannot repay is a money-losing proposition. With all the “bad” news already out, there is not likely to be any further drag to the market from this sector.
However, rising mortgage rates in late May and early June will hold back the speed of recovery to the fourth quarter rather than the third quarter as we had initially predicted. Even after factoring in the higher mortgage rates still points to overall improved affordability (because lower home prices and higher income effects will dominate). That will mean an inevitable pick up in home sales.
And let’s not forget. All real estate is local. Some of the national predictions will not mean a whole lot at the local level. Markets like Salt Lake City and Charlotte are strong. Boston, Northern Virginia and Sarasota, Florida, which had experienced a deep sales slump, have been showing signs of increased sales of late. Strong job gains in the affordable Houston and Dallas markets will continue to lead to higher home sales there.
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