Tuesday, February 20, 2007

Housing Slump Continues: New Information Shows Further Decline In Market

The housing market has been on a down slide for a over a year, but the National Association of Realtors recently released information from last month showing that the slump is far from over. Data regarding home prices and home production over the past month, as well as most of the results from the last quarter of 2006, brought with them bad news for the real estate industry. These figures come one month after the lone promising piece of information was released by the National Association of Realtors. Pending home sales jumped 4.9% last December, a number that, according to the National Association of Realtors was the largest jump in almost three years. Although that piece of news is a step in the right direction, the new data regarding prices and production make it clear that the market still has a long way to go. The market's current state is obviously affecting homebuyers, but it is also having a great effect on homebuilders, who have become extremely uneasy with the housing market. The slump is going to continue until homebuyer demand catches up with the overwhelming amount of supply left over from the housing boom, and hopefully then homebuilders will become more comfortable with the market.

One piece of recently released information that plays a big role in the continuing housing slump is home prices. The graph above shows the continuing downward trend that the numbers have been following over the past year. In other data released by the National Association of Realtors, home value dropped in the fourth quarter of last year in half of the United States' metropolitan areas for the first time since 1979. Throughout the nation, the median home price in the last quarter of 2006 was $219,300, a drop of 2.7% from the year before. James R. Hagerty said in an article found in RealEstateJournal.com that “prices began falling in many areas last year after a boom that pushed prices up at double-digit annual rates in much of the country in the first half of this decade." The biggest drop came in the Sarasota area of Florida, which fell 18% from last year. Florida is home to the majority of the biggest decliners this year, which Hagerty attributes to the "glut of new condominiums" that are "weighing on the market." Ohio is another part of the country whose homes have significantly dropped in worth, more specifically in cities like Youngstown and Toledo, which Hagerty claims are being "hurt by shrinking industrial employment."

One reason that this decrease in prices has gone on for so long comes from the overwhelming abundance of new homes in most areas throughout the country. These new residences were developed while the market was still at its peak, and are a big reason why numbers remain low in most areas. Prices will not begin to rise until homebuyers' demand can catch up to the current overwhelming surplus of supply. Hagerty's article presents another reason for the continuing slump, arguing that the lenders are being more strict with regards to their credit standards, making it harder for some potential homebuyers to obtain loans. This comes at the same time that late payments and defaults have been on the rise, something that could increase the number of foreclosures in the market.

Another statistic proving the slump will continue is the decrease in home production. As is shown in the graph to the right, housing starts, which is another term for home production, have dropped considerably over the past year due to lack of consumer demand. The Department of Commerce recently released data stating that the number of homes being produced decreased by 14.3% last month, bringing that number to its lowest point in ten years. In an article found on RealEstateJournal.com, Jeff Bater and Brian Blackstone break down the decrease in housing starts by region. According to the authors, "housing starts last month decreased by 28.5% to 301,000 units in the West, 15.2% to 195,000 units in the Midwest, and 11.8% to 716,000 units in the South. Starts rose 8.9% to 196,000 units in the Northeast." It is clear that builders still hold a pessimistic view of the market, and seem to be afraid to continue to build new communities. There might not currently be high demand for new homes, but if homebuilders remain skeptical and refuse to build communities in the future, they could end up hurting the market once homebuyer demand does catch up with supply.

Although on a big scale there has been a continuing decrease in all aspects of the real estate market, there are some areas of the U.S. that have shown signs that the trend could change relatively soon. Home prices may have declined in 73 metropolitan areas last quarter, but they also increased in 71 areas. The article written by James. R. Hagerty also reveals that places such as Atlantic City, whose median home price rose 26%, show signs that the market could turn around relatively soon. David Lereah, the National Association of Realtors' chief economist, is very optimistic about the housing market: he said, "Hopefully, the fourth quarter was the bottom of this current business cycle." Although the housing market will most likely continue to drop over the next few months, the fact that not every area in the country is struggling offers a bit of positive news for the future of real estate.

Another positive that can be taken out of the housing market slump is the increase in pending home sales that occurred last December. Rex Nutting, a contributing writer for TheRealEstateJournal.com, said in an article that during the last month of 2006, pending home sales rose in all four regions, the highest being 8.1% in the Northeast. In the article David Lereah spoke on the subject, "Some of the monthly gain may be weather related, but it appears buyers are becoming more comfortable, sensing the timing is good and that their local market has bottomed out. I expect modest sales gains throughout the year, with what I believe are sustainable levels of activity." Unemployment and mortgage rates remain low, which could go a long way in ending the market’s slump relatively soon. Still, the key to stabilizing the market remains with the homebuyer, and the slump will come to an end as soon as demand can meet the overwhelming amount of supply in the market.

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