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| When Will Your Market Hit Bottom? |
| Written by Jonathan Smoke | |
| 12.10.2007 | |
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Discuss this article on the forums. (0 posts) Glenn Roberts, Jr. of Inman News has an excellent current article, “When Will Market Hit Bottom?” in our Real Estate News. The article is the first of a three part series regarding current longer-term forecasts for housing. In this first installment, the author covers sentiments of several well-regarded economists from coast to coast who collectively seem to be oriented towards 2010 being the year when things will start to get better. While I must have been unavailable when Mr. Roberts was seeking input for his article, I saw many good points and observations in the piece. I was encouraged by Jonathan Miller’s observation that some local markets are faring quite well. Most other economists tend to act as if the U.S. is one big homogenous housing market that looks like the S&P/Case Shiller 10-City Composite. I also tended to agree with most of the comments from Nicolas Retsinas, director of Harvard University’s Joint Center for Housing: “If it weren’t for the credit problems in the mortgage market, housing may have been ripe for a recovery in 2008,” he said. “Credit is the lifeblood of housing in this country, and the squeeze basically shut off demand.”
We saw evidence that housing was working its way out of the first wave of this housing downturn early in 2007. The first wave was principally a result of investors dumping speculative properties in the more heated markets. This caused the first new home price declines that began in 2006 in many bubble markets.  Home sales started to recover early this year as new homes sold at a higher pace in April than any other month this year. But then the second wave of the housing downturn began when credit markets began panicking over mortgage defaults and the risk thereof from home price decline pressures.While our economic models paint a likely scenario that sales will remain depressed as home prices continue to decline through most of 2008, it is a mistake to believe that 2008 will be rotten in all housing markets, or indeed in every sector and submarket of even the worst housing markets. By all accounts, 2007 has been a rotten year nationally for housing, but at the October rate of new home sales, we are in for sales of over 700,000 new homes. That’s darn near the average annual pace of 810,000 new homes since 1985. If you go back further in time, 700,000 looks very respectable for a down year. Some new homes are selling. A large portion of these sales is arguably at a discount and packed with incentives in most markets, but buyers haven’t completely disappeared. That’s because some buyers are acting opportunistically and some simply need housing now that can’t be provided by renting. That’s why I am a little more optimistic about the bottom clearly being reached in most markets in 2008. Amidst this mind numbing parade of negative news on housing, people are still buying homes! Barring a severe economic recession, jobs should be steady and incomes should rise. That should translate into new home sales that reduce inventory levels, which should reach a point by year end 2008 where builders are not as aggressively discounting. That will relieve much of the pressure on home prices or enough so that the psychological stickiness of existing home prices combined with nominal price inflation should once again put most consumers into a position of believing that a home tomorrow will cost more than a home today. Once that tipping point occurs, the sales pace will pick up from the extremely anemic 2007 levels. This won’t happen in every market. Those suffering economically like Detroit and those suffering from massive overbuilding like Phoenix, Las Vegas and Miami might indeed take until 2010. I don’t live in Detroit, Las Vegas, Phoenix or Miami, so I am sick of the press acting like we all do. The key question is not “when will the market hit bottom?” but “when will your market hit bottom?” 
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