Location, Location, Location

By Lawrence Yun, NAR Chief Economist

As we know from the REALTOR® mantra - location, location, and finally, location - matters a lot. Contract signings to buy homes (i.e., pending sales) rose significantly in Sacramento, Riverside, Las Vegas, Orlando, and other markets that experienced significant price reductions. This has been evident for the past several months. What is new is that we are now beginning to see year-over-year increases in affordable mid-America markets. Columbus, Oklahoma City, Colorado Springs, Charleston (WV), and Spartanburg are examples. Pending sales increases appear to be broadening.

On the opposite end, pending sales have weakened sharply from a year ago in the Pacific Northwest and Texas. These areas have the strongest employment conditions in the country. Dallas, for example, has gained 57,800 net new jobs in the past 12 months - essentially a stadium full of people with new jobs. Yet, pending sales are trending low in Dallas. Because of the strength of the job market, many homes in both Texas and the Pacific Northwest have not experienced price declines.

As with any monthly data, there will be bounces and noises in the statistical measurement. I am encouraged by the rise, particularly in the hard hit areas, but several more additional months of similar gains would be needed to assure that a firm recovery is taking place. I am also encouraged by some cases of multiple-bidding in San Diego and other markets where prices have plunged from just one year ago. The multi-bidding suggests that there are buyers out there and that we may be hitting a price floor in these markets.

The near-term outlook is for gains in actual closings at the settlement table. The housing stimulus package that was recently enacted will also be a factor in helping to raise sales and carry the momentum into 2009. Many home buyers will want to take advantage of the home buyer tax credit. Consumers who have been facing outrageously high interest rates on "jumbo" loans will also get a break because of the permanently higher loan limits for FHA and Fannie/Freddie backed mortgages.

But before celebrating too early, we should be mindful of the fact that the pending home sales data coverage is less robust than the closings measured in the existing-home sales figures. So the trend in closings may not show a direct one-to-one relationship to pending sales. Furthermore, with lenders scrutinizing every mortgage origination, some of the contracts may fall out at the last moment.

The longer-term forecast also contains many uncertainties. Despite some growth in economic output as measured by GDP, the job market is unusually soft. Recent stock market gains could be genuine signs for better economic times ahead or could simply be a "head-fake" for stock traders who love volatility. Mortgage rates are still at near historically favorable terms, but that could change for the better or worse depending upon how stubbornly inflation stays elevated. Another thing to watch for is foreigners' appetite for U.S. government and Fannie/Freddie bonds. Then there's oil - these days, always a wildcard. If the price of oil slides to less than $100 a barrel, then it is likely the U.S. economy would growth much faster.

As for the housing market forecast, I would say that given the unprecedented speedy price declines in those hard-hit markets, most of the price cuts have already occurred. There is better upside potential than down from this point onwards. Though the national home price forecast is important for lenders and other macro players as they need to evaluate the overall national portfolio, it means very little to consumers. With so much variation, consumers need to do their local homework - and so do local REALTORS® - to assess what may happen in their market.

Unfortunately, there is a downside for this forecast for homebuilders. They will need to cut back further on production, as it will take some time to absorb the still-high inventory of both new and existing homes. And an important note: yes, both housing starts and permits rose significantly in June - total starts were up 9.1 percent from May and permits rose by 11.6 percent. But a big part of those increases
was in the Northeast multifamily sector, most likely due to an unusually large number of permits issued for multifamily residential buildings in New York City - the result of new construction codes in the city effective July 1 of this year. If we discount the Northeast multifamily figures, permits were actually down 0.7 percent and starts decreased 4.0 percent. Housing starts are likely to decline through the middle of next year and then settle at around 800,000 units (compared to over 2 million during the boom years). Consequently, I anticipate further declines in new construction and new home sales into 2009.

For existing-home sales, I am more optimistic. Resales will likely rise in coming months, as the impact of the recently signed housing legislation is felt.