What to expect next

Lawrence Yun 2 Last week I attended the Fall Forum put on by the St. Paul board of Realtors. I listened to Lawrence Yun's  as he talked about the economy and the housing market.  Yun has quite a resume but the reason he came to St. Paul is because he is the Chief Economist for the National Association of Realtors.

He did not sugar coat anything but his outlook is fairly positive. He says that we are in a recession and that we just don't know how deep it will be or how long it will last.

I wrote a post a couple of weeks ago about the clearance sale that seems to be going on in our local market.  The homes in the lowest price ranges are selling and I speculated as to what will happen once they are sold.  Yun says that when they are sold and the inventory goes down the market will be more balanced and stable, which means it won't favor buyers as much and the prices will stabilize as the inventory goes down.

In some neighborhoods prices seem to be stable.  The neighborhoods that have seen the sharpest decline in prices this year are the neighborhoods with the highest numbers of foreclosures in them.

The inventory of homes on the market in St. Paul has been declining. Yun predicts that there is a pent up demand and that home sales will be stronger in the spring.  The way I look at it home sales are always stronger in the spring in this part of the country so I would say it is a safe prediction.

I guess what we are all wondering is if we have hit bottom or if home prices will continue to slide in the metro area.  It is kind of like the stock market in that we won't know for sure until after the prices stabilize or go up, but at a much slower pace than they have in the last few years.

Also see local market conditions and housing prices

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12 Replies to “What to expect next”

  1. Patient Buyer says:

    There is demand, of course, but that demand is at much lower prices.

    What Yun does not discuss is the pent-up supply.

    There needs to be a serious analysis of the number of people who would like to sell but are waiting for higher prices. I went through this in a previous post.

    Let’s coin a term; must-sell inventory. This is comprised of foreclosures, short sales, and people who need to move due to job, family reasons, getting older, etc.

    What percentage of ‘must-sell’ inventory comprises the current market? As a whole is there more than the normal amount of inventory?

    How many houses WOULD be on the market right now if prices had held up?

    Those are your pent-up supply.

    We will not see 2006 pricing any time soon. Might be years. When that realization finally is absorbed by the sellers who are waiting, we will see what economists call capitulation.

    Examine Yun’s predictive track record before basing critical business decisions on his advice. Don’t take my word for it – check it out.

    The last year, and especially the last 2-3 weeks saw tremendous destruction of wealth, looming job losses, a global financial crisis, multiple government backstopping of an amazing number of institutions, etc.

    I want to know where the financing is going to come from so that all this ‘pent-up demand’ can give stubborn sellers their yearned-for appreciation.

    The global credit supply is shrinking at a very high rate, and with it consumer’s access to cheap credit.

    Those of use who waited patiently through this insane bubble are not about to make polite offers for the sake of nice social etiquette.

    Think of it this way:

    People like ME are Yun’s pent-up demand. Are we going to capitulate and pay higher prices? Probably not.

  2. Teresa Boardman says:

    there are sellers who want to sell, pent up sellers as you call them and I think I am addressing that a little in tomorrows post. No we won’t see 2006 again for awhile and that is fine by me. More stable prices would be nice.

  3. Patient Buyer makes a lot of good observations. Last week while T was listening to Lawrence Yun I was listening to a Phd from Wells Fargo. He spoke to the things PB is talking about as well as future foreclosures still coming and it was at that moment that I wiped 2009 off the calendar as the year of recovery. I wasn’t expecting huge price increases in 2009 but I was hoping for a strong support level to come into the market at the end of this year. Now it sounds more like next winter.

    With all that though, I am still glad I bought a new house for myself this fall. I got it at a rate just under 6% and with a loan program that no longer exists. I also got it for 60% of what it sold for in 2007. I’m quite confident that no matter what happens in the next 12-18 months, 60-72 months from now I will have a smile on my face when I look at the sales around me.

  4. Teresa Boardman says:

    Aaron you might be right about 2009 being off of the calendar for recovery. There has been a lot of bad news this week and if the unemployment rate continues to decline home sales won’t be brisk.

    One of my clients bought a foreclosure a couple of months ago at a very low price. She too go a bargain and is very happy that she bought when she did. She wanted a place to live and didn’t want to rent anymore. 26 years old and a home owner.

  5. Patient Buyer says:

    Recovery of what? Sales volume or price appreciation?

    Let me be clear – I am only speaking about price appreciation.

    I fully expect sales volume to keep increasing year-over-year from this point forward. The fuel that will drive this is price decreases.

    Each ‘pent-up’ buyer will be slowly lured into the market as prices creep downward. There will probably be an annual year-over-year bump somewhere in the near future (sales volume), but sellers won’t be able to suddenly jack up the price.

    The bottom in sales volume is very likely behind us already. Volume and pricing trends do not track equally. Remember that really slow sales at the pricing peak? When people tried to point out the bubble, the reply was that prices were still up.

    Yeah, but sales volume was approaching a bottom.

    Here is the kicker:

    For the foreseeable future, ‘price appreciation’ will need to be removed as a bullet point on the brochure.

    We are going back to the days when equity was primarily built through payment of principal.

    For decades, paying off the mortgage was a goal, and a means of savings through equity. And RE prices rarely slumped.

    But when the idea that RE rices can’t ever fall became the primary justification for a global financial bubble, then houses began to develop a speculative component that is now collapsing.

    “Equity through payment of principal” needs to be the bullet point that is pushed. Watch and see, that will be what everyone is talking about in a year or two.

    And with prices at such lows, the notion of owning a house debt-free will seem possible, and desirable.

    As agents, I think you will enjoy that market even more than the highly leveraged market of before.

  6. Teresa Boardman says:

    I agree with everything you say except that volume will go up. Where are these buyers going to come from? Here in Minnesota the number of households being created is getting smaller and as our population ages there is a higher percentage of people in the age groups that are the least likely to move. So I guess I am wondering where the volume will come from. immigration? There is not enough immigration to Minnesota from other states. There is immigration from foreign countries but at this point home ownership remains low among new immigrants. Maybe it will pick up but it will take awhile.

  7. I think 2009 sales units will be close the the same as this year, which will still reduce inventory but much slower. My feeling is that until prices stop falling and a bottom is found in pricing that many buyers will sit and wait it out. Just like in the stock market today, many people are waiting to hear that the bottom is in before they put money back on the table. Add to that the economy going in to a 9-12 month recession and I don’t see the job creation (or immigration either) that will bring about substantially higher sales.

    Further, short sales and foreclosures are one-time transactions… those sellers are not buyers at this time so consequently in the past when one sale occurred, you typically had 1-3 more trickle “up” the price points. Now you see none of that… a lot of contingent buyers that have little hope of becoming non-contingent unless they price their house according to the current market.

  8. Patient Buyer says:

    I would like to challenge the idea that ‘many buyers’ are waiting for the bottom. This is, IMO, a backwards way of looking at it. There won’t BE a bottom until the ‘many buyers’ create it.

    The bottom will occur when this large contingent of people waiting decide that buying is better than renting.

    For buying to be better than renting, the sum of tangible and intangible values must be equal to or greater than the approximate rent payment.

    When prices drop to the point that buying costs the same as renting (in monthly payment terms), then even if prices decline a bit more, people who want their own place will buy, since payment of principal guarantees long-term equity, and eventual freedom from a monthly payment.

    Suppose rent is 1200 and purchase (PITI) is 1000.

    Clearly, the 200 per month saved is cash in hand NOW.

    This will motivate many to buy regardless of whether small declines in value still come.

    I plan to buy before the bottom is in myself. When y-o-y declines stabilize, that will be good enough for me.


    If you are skeptical about an increase in volume, then you must really be skeptical about an increase in pricing. The only way you could get price appreciation going again without a large volume increase will be a sudden supply contraction. If ever greater numbers of homeowners decide not to sell, then this could happen.

    However, when the majority of boomers begin to move to nursing homes, then look out below on house prices.

  9. Teresa Boardman says:

    PB – I am skeptical about a volume increase. Also thinking when boomers leave their homes unless we have a lot of migration there is going to be another crash of some sort. As for price increases I think they will be small.

    As for home buying it worked well for us and millions like us. When we bought our mortgage was higher than rent and the value of the place went down the first three years. Today we pay about half what we would for a similar sized home. and we have a lot of equity and it will be paid for before we retire. Much cheaper than rent for us.

  10. Patient Buyer says:

    What will cause the price increases if volume does not increase?

    You point out boomers leaving their houses (probably for FL or AZ, etc.), and the need for people to migrate here.

    What fundamental economic force will raise prices?

  11. I think most markets across the US are bottoming. I think 09 will be the bottom for unit sales. I think the numbers will be pretty bad across the board.

  12. Patien Buyer says:

    Mr. Oliver:

    Bottoming based on what economic fundamental? I think we can both agree that house prices are a function of household income, multiplied by access to credit and willingness to borrow.

    Those three factors are all trending negative. Unemployment is rising, replacement jobs are paying much less. Access to credit is tightening. Yes, you can still get a mortgage if you are a SOLID BUYER, but you need more down in many cases, and underwriting guidelines are tighter. Willingness to borrow is curtailed because people may not be willing to stretch as far as they once did since fast (or any) near-term appreciation is no longer seen as a motivator.

    Which one is stabilizing? Without definitive stabilization in the access to and willingness to deploy debt, prices cannot stabilize. Unless supply constrains enough to account for those factors.

    In other words, if a huge number of sellers retreat from the market for a number of years, then prices may rise.

    But believe me, realtors would be hurt much more than that than by slipping prices.

    Again, I see that the volume bottom has likely passed, but the price bottom is some ways off.

    Note that I am not necessarily disagreeing with you – but I see no factors that can put in a bottom.

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