Hot Housing Fading in the Rearview Mirror

"This week has brought several new readings indicating that the super-heated real estate market of 2004 and 2005 is rapidly fading in the rearview mirror."

"Housing starts and building permits were down sharply in April, and builder confidence is at its worst level in almost 12 years, according to an industry survey."

"Economists, investors and the Federal Reserve are watching home building and home sales carefully because the sector has reached so far throughout the economy in recent years, lifting all manner of consumer spending and economic activity."

"You don't need to be in the market to buy or sell a home to be affected by the cooling housing market."

'"Housing accounts for between a fourth and a fifth of the GDP (gross domestic product)," said Walter Molony, spokesman for the National Association of Realtors, referring to the broad measure of the nation's economic activity. "So many other industries see sales tied to the purchase of a home. We get calls from Singer sewing machines about our home sales statistics."'

'"It's going to be very similar to the stock bubble, but even more so. Many who didn't own stock lost their job when the market plummeted," said Dean Baker, co-director of the Center for Economic and Policy Research, and one of those who believes housing prices have resulted in an asset bubble ripe for a correction."

"They might not be directly connected to the housing industry, but they could find themselves affected, even if they work at a factory, or at a local mall. A lot of people have been sustaining their consumption by borrowing against the rise in their home's equity. If that stops, it certainly has to slow consumption considerably."

"David Seiders, chief economist for the National Association of Home Builders, agrees with Baker that it's been the run-up in home values that has helped fuel consumer spending in recent years, even if he also believes that home prices will continue to climb, albeit at a slower pace."

'"It's pretty clear that equity growth is what's fueling spending and allowing a negative savings rate," said Seiders."

"Jeoff Hall, the chief U.S. economist for Thomson Financial, said that for every 1,000 single-family homes built, there are about 2,500 full-time jobs created, $80 million in payroll and $45 million in local, state and federal taxes paid."

'"As we try to clear this inventory of unsold homes, there's going to be a lot of layoffs in construction, and less revenue from the creation of housing," said Hall."

"Residential contractors added nearly 200,000 jobs last year during the white-hot building boom, or about one job out of every 10 created in the broader economy."

"That means that if the National Association of Homes Builders is correct and there are 150,000 fewer new home sales this year compared to the 2006 record, that's 375,000 fewer construction jobs, or the equivalent of about three companies the size of General Motors."

"If you're looking for evidence the economy is slowing, it's housing," said Baker. "Everything we've seen the last four to five months shows pretty clearly that housing is slowing."

Deep Thoughts by Bruce Norris

"The word 'bubble' has been used so often it has lost its significance. Many economists scoff at the idea while others have been waiting for this over-priced real estate market to 'crash' for years. Somewhere in the middle lies the truth and the consequences will be felt by hundreds of thousands of unsuspecting real estate owners. By the end of 2007, no one will need to ask if there had been a real estate bubble."

"The United States has a few areas with significant price bubbles. One of the worst cases is right here in California."

"To qualify for a home, many buyers are stretching their budget as if there was no tomorrow. Lenders have become a willing partner in this dance of debt. As long as prices have moved upward, everyone is lulled into thinking all of this makes sense. Tomorrow is just around the corner for many of these aggressive buyers and lenders."

"In 2006, there exists in the entire country 8 trillion dollars of debt. Approximately 1.3 trillion of that debt will have its first payment adjustment between now and the end of 2006. Almost 15% of all the real estate debt in the country will have payments go up in a real estate market that has lost its 'glitter.' In California, the percentage is much higher because buyers stretched so hard to 'get in' on the booming market."

"Here's how the California market will make the transition from boom to bust as outlined in our new report the California Crash. It starts with affordability getting too low. When so many people can't afford the monthly payment, our market loses velocity."

"Because of that we sell less real estate. The first sign of this happening will be growing inventory of available homes for sale. Inventory has already doubled between 2005 and 2006, going from a 3.3 months supply to a 6.7 months supply. The good news is that the inventory is still mostly owned by people, not banks. That will soon change."

"The increase in inventory happens to the builders as well. They have a tougher time selling homes and offer discounts, incentives and cooperation with brokers. The bottom line is that the 'mood' will have changed. Unsold inventory means less homes being built in the future. This creates a domino effect because the builder has to lay off workers."

"When an area loses people, demand is gone and so is the artificial "stimulus" that caused the price boom in the first place."

"When this happens, real estate as an investment has to attract people because it creates cash flow instead of inflating in price. What percentage of our real estate market has been made up of investor purchases? Most estimates are around 20-25%."

"The truth is these people weren't investors, they were speculators. You might say speculation has been a marvelous investment. However, speculative markets become overpriced because they ignore the underlying numbers. Why would you buy a piece of property in California, as an investor, for $450,000 when it will only rent for $1,500 a month?"

"As prices stop going up (in most California areas they already have), people who get behind in their payments have a problem. They don't have sufficient equity in their properties to pay for the cost of a sale. Many of these owners of homes financed with adjustable loans will have no choice but to lose their homes to foreclosure."

"When foreclosures occur in a market where the 'mood' toward real estate has changed, more often than not, the lender ends up with the property. Now, when you and I want to sell our homes, we'll be facing stiff competition from lender owned property, including HUD."

"These lenders can and will offer these homes at increasing discounts. This creates more problems for the seller because as values decline, equity shrinks. The last downturn saw trustee sales increase by 981%. I expect the increase this time to be 2,000%. Why?"

"Because during the last down cycle, interest rates declined. Everyone who had an adjustable mortgage ended up with a gradually lower payment. I expect the opposite will occur this time."

"The builders will join in the party by offering their unsold inventory via auction. Since the 'mood' will have shifted, the owners who already live in the tract can expect to see the sale prices at the auction go below what they owe."

"How many people will be affected? In some ways, we all will be affected. When prices go down we feel less secure about spending. We'll probably go on a few less trips and spend a little less on toys. For some of us, these will be very tough times."