Smart money is leaving the real estate market

Experienced observers believe informed investors are pulling out of the housing market because of continued stagnation. The UCLA Anderson Forecast for the second quarter of this year predicts a sluggish U.S. economy due to cooling of the housing market.

Forecast Director Edward Leamer said, although the economy will remain sluggish throughout the year, he sees little likelihood of a recession. Nonetheless, Leamer and his colleague, Michael Bazdarich, believe conditions for a recession are in place.

Leamer told “Our feeling is that there are certain precipitating events that must occur before a recession can be forecast, and these events have not occurred yet. The conditions are in place for a recession (such as the cooling of the housing market and the related wealth effect), but we are not seeing evidence that it will happen within our current forecast period.”

Dr. Christopher Thornberg, a member of the forecast staff, told a blog called The Housing Panic: “Actually, what we are seeing is a very typical slowdown in the market so far—there is nothing particularly soft about it (the landing in bubble markets). The claim is that because unit sales are falling but prices are still going up, that this is an unusual slowing. The fact is that most breaking markets start with activity, and it takes three to four quarters for that to take all the wind out of price appreciation. How hard it will be, remains to be seen.”

Asked what U.S. markets are most at risk of collapse, defined as price drops of more than 20 percent from real median home sale prices at peak, Dr. Thornberg said: “Prices fall when you lose jobs. Right now, the non-housing part of the economy is picking up speed, thus stabilizing things.” He said speculative markets, like Florida and Arizona, are at the greatest risk.

Leamer said consumer spending for the past several years kept the U.S. economy buoyant and fueled expansion. That ability was fueled in part by the dramatic increase in real estate values. That’s a trend, he indicated, that is no longer sustainable. He said as the housing market chills, consumer spending will stop being the engine driving the economy.

According to HUD, housing market performance in the first quarter of this year was mixed. Production levels set new records, but housing sales declined. Single family starts and completions set new records, while sales of new and existing homes declined but still were at high levels. There was growing concern that the inventory of new homes for sale was at record-high levels, and the number of existing homes on inventory was up 40 percent in the last year. Homeownership dropped to 68.5 percent in the first quarter of 2006.

HUD reported interest rates for 30-year, fixed-rate mortgages, in the first quarter of this year averaged 6.24 percent, a rise of two basis points from the fourth quarter of last year and some 48 basis points higher than the first quarter of 2005.

In the first quarter of this year, HUD said, a family earning the median income of $58,634 had better than 112 percent of the income needed to buy the median-priced existing home at $217,900, using standard loan guidelines. That is up 2.5 points from the first quarter of 2005.

Last year’s hurricanes on the Gulf Coast damaged more than 1.2 million housing units with more than 309,000 of them getting severe damage. The brunt of these storms was borne by Louisiana, Mississippi and Alabama, but also struck Texas and Florida.

Sagacious investors like Warren Buffet haven’t completely abandoned real estate, though. Buffet’s Berkshire Hathaway group is putting a good chunk of its funds into the blazing hot real estate market in India, along with other smart money operators.

Back in the U.S., Dr. Thornberg observes: “Even if the real estate market doesn’t pop, the fact that it has to start cooling is enough to slow the process down. Prices don’t have to go negative to have an impact, just 15 percent is enough to start the dominoes falling.”

From the June 14-20, 2006, issue

Enjoy The Rock River Times? Help spread the word!