Pool of Buyers Shrinking
The Washington Post
“The U.S. economy is more dependent on housing than it has been in a half-century, as the sector fuels consumer spending and has accounted for nearly three-quarters of the nation’s job growth in the past five years.”
“By almost any measure, the U.S. economy is built on housing more than in the past. In 2005, investment in housing constituted a higher proportion of the goods and services the nation produced than it has since 1950, when the nation was experiencing a massive postwar housing boom. The proportion of jobs in real-estate-related fields is the highest it has been since at least 1970.”
“As a result, economists worry that the housing slowdown that began late last year could hurt the broader economy more than past real estate downturns. Now the companies that have benefited from this expansion are bracing for the great unwinding.”
“‘Those economies where housing has gone skyward are most vulnerable as housing comes back down to earth,’ said Mark Zandi, the Moody’s chief economist.”
The risk of home price declines in the Bay Area is increasing as interest rates rise and the pool of potential buyers is shrinking, according to a quarterly study by a mortgage insurer.
The chance that real estate values in the region's three major metropolitan areas will fall during the next two years stands at 55 percent or greater, researchers at Walnut Creek's PMI Mortgage Insurance Co. said
In the San Francisco Bay Area, defined as San Francisco, San Mateo and Marin counties, homeowners face a 55 percent likelihood of price declines, up from 50.7 percent. The San Jose area, made up of Santa Clara and San Benito counties, has a 54.8 percent chance, up from 53 percent.
The Oakland area, encompassing Alameda and Contra Costa counties, has a 57.6 percent chance of a price drop before 2008, placing it seventh on the list of the 50 riskiest markets. In PMI's previous report, the city had a 55.8 percent chance.
San Diego, with a nearly 60 percent chance of a price decline before 2008, ranked as the nation's riskiest market. Pittsburgh, Memphis and Cincinnati were among the least risky markets. Forty-eight of the 50 markets saw their risk indexes rise.
The report analyzed fourth-quarter federal data on household incomes, home-price growth, employment conditions and interest rates -- which jumped an average of about one-half of 1 percentage point between the third and fourth quarters.
Appreciation rates in half of the regions studied slowed between the third and fourth quarters. But barring an economic shock, researchers at PMI expect prices to slowly moderate in most markets. The Bay Area bucked the trend, with prices increasing marginally between the last two quarters of 2005 -- adding to the potential for future declines.
"If you're a short-term player in the market, it's possible you can buy something and sell it within a short period and make a lot of money," said Mark Milner, chief risk officer at PMI. "But it's also possible you can lose money."
"Americans snapping up second homes - as investments or vacation properties - accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors."
"Ron Peltier, president and chief executive of HomeServices of America, the country's second-largest residential brokerage firm said, "A lot of people have just speculated in real estate."'
"The trend really started after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. The exemption is $500,000 for married couples, $250,000 for singles, if it was their primary residence for two of the past five years."
"Under the old system, the only way to avoid the tax was to "roll" the gains into another home of equal or greater value. Americans bought bigger and costlier homes. But now, they can downsize and use the equity built up in their homes to buy second homes."
'"That's what spurred all this on in the beginning," says David Lereah, the NAR's chief economist."
"He thinks the trend crested in 2005."
'"What's going to be leaving the market right now are the speculative investors who came into the market and were trying to flip homes," he said. "They were buying one, two, three or four properties at a time, and that was distorting the numbers."'
“William Lyon Homes, which builds homes in California, Nevada and Arizona, on Wednesday said first-quarter new home orders fell 26 percent. The company said orders fell to 647 homes in the quarter compared with 873 the prior year. The Company’s cancellation rate for the three months ended March 31, 2006 was 28%, compared to 12% for the three months ended March 31, 2005.”