Still A Buyer’s Market

by Lawrence Yun, NAR Chief Economist

Modest near-term movement is expected in existing-home sales, with a
recovery in sales seen during the second half of the year. The Pending
Home Sales Index, NAR’s forward-looking indicator based on contracts
signed in May, fell 4.7 percent to 84.7 from an upwardly revised
reading of 88.9 in April, and remains 14.0 percent below May 2007 when
it stood at 98.5. Some pullback after a sharp increase in the previous
month was expected. The overall decline in contract signings suggests
we are not out of the woods by any means. The housing stimulus bill
that is still being considered in the Congress is critical to assure a
healthy recovery in the housing market, jobs and the economy.

But location has never mattered more than in the current market.
Look at the pending home sales index for the West. While it’s true the
index slipped 1.3 percent to 97.5 in May in that region, it was 2.0
percent higher than it was in May of 2007. Indeed, some markets have
seen a doubling in home sales from a year ago, while others are seeing
contract signings cut in half. For instance, double-digit pending sales
gains in May from a year ago were noted in Colorado Springs CO,
Sacramento CA and Spartanburg SC. In addition, price conditions vary
tremendously, even within a locality, depending upon a neighborhood’s
exposure to subprime loans.

Current real estate market conditions are positive for most buyers:
still-attractive interest rates, a large inventory of homes available
for sale, and many sellers willing to negotiate their prices –
sometimes significantly. And in spite of the headlines surrounding
issues with Fannie Mae and Freddie Mac – as well as the recent federal
“takeover” of IndyMac – there is still mortgage capital out there.
Credit may be tightened, but lenders are still happy to originate a
mortgage loan to households who qualify. And remember: owning a home
still provides long-term value – and most buyers today plan to remain
in their homes for five or more years. Home buyers can get a great deal
right now.

Concerns Remain

Yes, there are some concerns on the horizon. Although inflationary
expectations appear to be under control for the time being, sharper
consumer price gains could lead to notably higher mortgage interest
rates in 2009. Based on current indicators, the 30-year fixed-rate
mortgage is forecast to rise gradually to 6.5 percent by the end of
this year, and then hold at that level for most of 2009. But note –
that is still well below the “threshold” level of 7 percent. In spite
of a month to month decrease from April to May, housing affordability –
as measured by NAR’s housing affordability index — is improving this
year and is likely to rise 15 percentage points to 127.0 for all of
2008.

Existing-home sales are expected to grow from an annual pace of 5.01
million in the second quarter to 5.75 million in the fourth quarter.
For all of 2008, existing-home sales should total 5.31 million, and
then increase 5.0 percent next year to 5.58 million. That is less than
100,000 unit sales off the annual pace last year.

The speed at which home prices have declined in a few select markets
is unprecedented, but the large price declines in those areas have
enticed bargain hunters back into the market. Interestingly, there have
been reports of multiple bidding after the large price cuts, so it is
possible that most of the price declines have already occurred in those
markets. The aggregate median existing-home price (on a national basis)
is projected to fall 6.2 percent this year to $205,300, and then rise
by 4.3 percent in 2009 to $214,100.

New-home sales are a different story. They are likely to fall 32.3
percent to 525,000 in 2008 and decline another 3.4 percent next year to
507,000. In light of high inventory conditions, rising commodity prices
and construction costs will curtail new home construction deep into
next year. Housing starts, including multifamily units, will probably
fall 28.7 percent to 966,000 this year, and then drop another 9.0
percent in 2009 to 879,000. The precipitous drop in starts is due in
part to some overbuilding during the “boom” years, as well as the
rising costs of construction. The median new-home price is expected to
decline 3.2 percent to $239,300 this year, and then rise 5.3 percent in
2009 to $251,900.

Officially, the U.S. economy has still not drifted into recession.
In fact, GDP growth in the first quarter of this year was revised
upward from preliminary estimates – albeit at a slow 1.0 percent rate.
Growth in GDP is forecast at 1.6 percent for all of 2008 and 1.4
percent next year – not spectacular, but still positive. Inflation, as
measured by the Consumer Price Index, is forecast at 3.7 percent this
year and 2.4 percent in 2009. Unfortunately, personal income gains are
unlikely to keep pace with rising prices. Inflation-adjusted disposable
personal income is projected to grow 1.5 percent in both 2008 and 2009.

Conclusion

So, what does all this mean for housing consumers? It will continue
to be a buyer’s market for a while. Obviously, we will need to watch
developments with credit markets and the GSEs, but if a potential buyer
can qualify for a mortgage, there is plenty of choice out there.