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PARALLEL UNIVERSE: Inside the Beltway, Cheerleader for Housing Industry Says Housing Bubble Bursting is Good News

Posted by kinchendavid on October 12, 2006

By David M. Kinchen
Editor, Huntington News Network

Hinton, WV – There’s a big snowstorm brewing in the Upper Midwest and snow flurries may make an appearance in the Mountain State, but leave it to the National Association of Realtors to break out the lemonade. As in if you have lemons, make lemonade.

The latest press release from the NAR — on Oct. 11, 2006 — is headlined: “Home Prices Correcting, Buyers Returning to the Market.”

As a veteran real estate reporter who began covering the housing market more than 35 years ago, I predicted last year that rapidly inflated home prices couldn’t be sustained in the wake of massive consumer debt and incomes that weren’t even keeping pace with inflation. It’s happened in California, where I covered housing at the L.A. Times for more than 14 years. It’s happening in Las Vegas, Phoenix, Dallas and will soon happen in places like Chicago, which has experienced an unprecedented condominium boom in the downtown areas, especially along both banks of the Chicago River adjacent to Lake Michigan.

The NAR says that “home sales appear to be bottoming out with lower home prices attracting buyers in many areas of the country.”

David Lereah, NAR’s chief economist, said the housing market is showing signs of life and that sales may be leveling out. “Many potential home buyers who have been taking a wait-and-see attitude or taking their time and being methodical in the search process are being enticed by lower home prices,” he said. “Given a positive economic backdrop of lower interest rates and job creation, we expect sales activity to pick up early next year.”

Lereah is paid to be optimistic; I’m paid to take the spin out of what passes for news and I say a major downward correction will be necessary to attract buyers to a still overpriced housing market. Prices are so far out of kilter with reality – and realty – that actual declines will have to be substantial to attract buyers, in my opinion.

The NAR says that “existing-home sales are forecast to be fairly stable in the fourth quarter and sales for all of 2006 are expected to drop 8.9 percent to 6.45 million – still the third strongest year after consecutive records in 2004 and 2005. New-home sales are forecast to fall 17.3 percent this year to 1.06 million, the fourth highest year on record. Housing starts should be down 10.9 percent to 1.84 million in 2006.

The trade association of the nation’s real estate agents adds: “with a recent correction in the market, the national median existing-home price is likely to rise 1.6 percent to $223,000 for all of 2006; it’s anticipated prices will remain slightly below year-ago levels before gaining positive traction in the first quarter of 2007. The median new-home price is projected to decline 0.2 percent to $240,500 – largely the result of builder price cuts to move unsold inventory.”

Folding the legs and setting up his lemonade stand table, NAR President Thomas M. Stevens from Vienna, Va., says in the release: “this presents a unique opportunity for buyers. The supply of homes on the market is the highest we’ve seen in over 13 years, and mortgage interest rates are experiencing an unexpected decline. The 30-year fixed rate is hovering around 6.3 percent, and sellers in most of the country are now showing a willingness to negotiate. While this changing market is a great time to buy, it’s become increasing important for parties on both sides of the real estate transaction process to have professional representation.”

I guess the real estate sales industry is the only place where a record inventory of unsold houses – the most since 1993 – is good news, but so be it. Car manufacturers have a high inventory of unsold vehicles and they don’t see it as good news.

According to the economic double-domes at NAR’s Washington, DC office, the 30-year fixed-rate mortgage will probably average 6.5 percent in the fourth quarter but will “trend up modestly in 2007.” If they want to move the houses, the folks at NAR should talk Fed Chairman Ben Bernanke into lowering rates, but that’s not likely to happen with the prospect of rising inflation.

The NAR says that the unemployment rate should average 4.8 percent in the fourth quarter. Inflation, as measured by the Consumer Price Index, is expected to be 3.4 percent for all of 2006, while growth in the U.S. gross domestic product is forecast at 3.3 percent. Inflation-adjusted disposable personal income is likely to grow 3.4 percent for 2006.

I’m not saying “I told you so…or maybe I am. When you’ve put a few hundred thousand miles on a career of covering real estate, you gain perspective about the peaks and valleys – maybe even depressions – of the housing industry.

Editor’s Note: David M. Kinchen began covering real estate at The Milwaukee Sentinel in 1970 and continued from 1976-1990 at the Los Angeles Times. He’s been a member of the National Association of Real Estate Editors since 1971 and was president in 1984.


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