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US Housing Market Crash? Not yet, anyway

by wchurchill Fri Jul 7th, 2006 at 03:55:28 PM EST

There was some discussion on this site at the end of last year that  predicted that the US would see a crash in home prices, which have spiraled over the past several years.  There were also predictions that this would be the start of a crash in the American economy.  Most forecasters of the American real estate market had expected a definite cooling in the market, with fast growth areas slowing down dramatically in pricing (perhaps some price drops in these areas), but not an actual housing crash.  I thought this might be a good time to update ET on what has happened in the housing markets, and some of the recent thinking on the future.

At this point it appears that while the red hot housing market has cooled, a housing crash is unlikely.

Still, the average median existing-home price jumped 6% from a year earlier to $230,000.

The average single-family home price will rise 3.5% between now and June 2007, says David Stiff, an economist with Fiserv Lending Solutions, which he says is still a decent gain.

In fact while definite cooling has and is expected to continue to occur, other areas of the country that have not benefited from the very strong price gains of the last several years, may now benefit:

But the index also showed that slowing price appreciation is balanced by underlying economic strength, said Mark Milner, PMI Mortgage Insurance's chief risk officer, in a statement. "In the absence of an unexpected economic shock, this makes a gradual cooling of the market the most likely outcome," Milner said.

"We'd reached a point where prices had gotten too far away from economic fundamentals," he added. "A return to a more normalized appreciation climate is a natural outcome."

And even though appreciation is slowing in a number of former hot spots, PMI found that half of these large metropolitan regions will maintain double-digit appreciation rates over the next two years.

Moreover, Yun says Portland, Ore., is seeing its housing market warm up, in part because prices in the city are very affordable relative to those in Northern California, and the area's job growth is strong.

On the East Coast, Yun says Richmond, Va., and Virginia Beach, Va., will benefit as people in the Washington D.C. region decide to cash in on big gains in that hot market to buy a larger home further south at a lower price.

"Baby boomers are buying their second homes now and plan to someday make them primary homes when they retire," Yun says. "Boomer buying patterns will keep a bust from happening in housing and will help shift hot spots to different parts of the country."

This referenced article does expect a 3--6% price decline over the next 12 months in some of the hottest areas that have seen 90%--150% price gains over the past several years, but not a crash.

Overall, the US economy boomed in Q1 2006, growing at 5.6%.  Q2 was expected to slow dramatically, well below 3% (still fine but down), but latest estimates of Q2 are now for 3.3% growth, and an even stronger Q3.  I would say that there is a variety of opinion on the going forward growth rates.  The US markets seem to have two major concerns: first will the new Fed Chairman overreact to trying to slow inflation--the inter-bank rate has been raised 17 straight times, now at 5%, even as some see a slowing economy.  Will he overreact and put the economy in a recession?  (good for Drew who is now smacking his lips over a perceived wonderful pint of bitter, collected in London from yours truely).  And second, the stock markets really don't like the uncertainty in the world with terrorism, and Iraq, Iran and North Korea--most recently shown with the market impact earlier this week when the North Koreans launched their test missles.

I'm still betting on a slowing, but still growing US economy, a Dow above 12,000 by year end, no recession, and Drew paying for the pint. -:)

PS: I don't recall Drew being one of those forecasting a housing crash, and I didn't mean to imply that--just savoring the hope of that pint.

Housing "crashes" are rarely much more than 10-20% in the frothy California/New York type markets.  It's hard to get real estate to crash (or spike) in places where the cost is still $100K and population growth is nil.  A 20% retracement when prices have gone up 100% in 6-7 years is not that much.  Hard on zero capital buyers, but most of us who werent' selling anyway don't much care.

We're seeing a major league slowdown out in state #50.  Sales are down 50%.  Prices are being marked down from obscene to merely ridiculous.  People were asking $750K for old POS that would have sold for more like $300K in 2000.  Now that a 30 yr fixed is up to 6.5-7% range, the bloom is coming off the rose.  Realtors aren't whining yet, but looking a little concerned.  Wouldn't take much to send us into a 20% retracement -- tourism recession, another 1% on mortgages etc.

There are signs everywhere.  It's unreal.  So far real estate for sales are outnumbering political signs about 10:1.  That will change as we are down to 70 days to the primary (which is the real election in many races).

by HiD on Sat Jul 8th, 2006 at 04:51:14 AM EST
Housing "crashes" are rarely much more than 10-20% in the frothy California/New York type markets.
I had the personal experience of buying a somewhat upscale condo in southern California in 1990, when the housing slump was already 1 1/2 years along,,,,,and finding when I wanted to sell in '93 that prices were down an additional 30%.  And I've been in California now for 17 years,,,,and the market seems to me to be very volatile, both up and down.  So I guess my personal experience has been different than yours--I don't have any published statistics on California to support either of us.
by wchurchill on Sun Jul 9th, 2006 at 03:06:39 AM EST
[ Parent ]
I had one in Norcal the same time.  

Bought in 87 for $290K, identical sold for $415 in 89,
By 95 prob back to $320ish.  Luckily we didn't need to sell until 99 for roughly $490K.  Sold again last year for mid $900s.

Yes CA is ugly volatile, but mostly to the upside.  That 90-93 puke out was the worst I've ever seen in this country.  UK in early 90's (London area) was equally ugly if not worse.  It's just pretty unusual for the haircut to be more than 20% in my experience.  

Condos are worse than single family houses to the downside as you are now well aware.  

by HiD on Sun Jul 9th, 2006 at 06:56:43 AM EST
[ Parent ]
Watching HGTV makes me wonder if any condo exists in SoCal that is not upscale, at least in price.  You can't buy a closet in LA for less than half a million these days.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jul 9th, 2006 at 08:25:05 PM EST
[ Parent ]
I have to confess that a large part of me is cheering for a strong decline in housing over the next several years, because prices are reaching too high a level in Britain for the salary I'll likely start at if we stay in Britain for a period beyond grad school.  Decent townhomes with enough room to raise kids in Notts seem to be selling for around £80-90,000, while starting salaries for lecturers in economics are about £22,000.  Jen is planning to become a teacher, so I assume she'll start at roughly the same salary.  (Shrugs)  Could be worse, but I'd prefer to not take on too much debt when we do arrive at that point.

Salaries are a bit better in America and Canada, but it's more difficult to find a position at a strong school in a major city.  We've been thinking of Atlanta ever since we visited.  (I immediately fell in love with it.)  But prices have become outrageous, and the problem is that, rather than seeing house prices fall, rents are beginning to rise significantly in and around Atlantic Station (near the universities).

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jul 9th, 2006 at 04:34:00 PM EST

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