Expert Discusses Shifting Market, How Deadlocked Buyers & Sellers Must Play It

David Berson, chief economist for Fannie Mae, put it this way:

“Unsustainable trends eventually come to an end.”

This is one of the few indisputable laws of economics, and pretty much sums up where the Florida housing market currently resides.

The Federal Reserve chairman, on the other hand, was more ambiguous:

“The downturn in the housing market so far appears to be orderly.”

In classic Ben Bernanke-speak, the head of the U.S. central bank simultaneously calmed analysts and raised the red flags. An orderly real estate downturn sounds okay, doesn’t it? But “so far” implies that it won’t necessarily be okay for long. And what does this all mean, in practical terms, for people who need to sell a house in next couple of months? What about first-time buyers worried if the property they buy will be worth less in a year?

Part of Bernanke’s job, it seems, is to avoid specific predictions at all costs. You won’t get answers out of him anytime soon. But Berson and other housing experts are paid to make specific projections, and he offered them July 20 in his mid-year forecast conference.

Below are excerpts from his remarks:

– The Federal Reserve is not quite done with its crusade against inflation and will bump up short-term rates again in August, Berson believes. From then on, rates are likely to stabilize, bringing at least a temporary calm to rising Florida home loan rates.

– Home price appreciation, which has been running at double-digit annual clips for the past year in many markets, may drop to 3 percent or less by the end of the year. Berson is much more pessimistic than most of his counterparts when it comes to the extent of the weakening market’s decline, as many are calling for slower, but still sizable appreciation of 4-6 percent.

– If speculative real estate investors continue to dump massive amounts of rental properties and second homes bought during the boom years onto the market later in larger than expected numbers, Berson believes appreciation could fall to around 1 percent annually — a level not seen since the recession of the early 1990s.

– In a handful of markets where investors account for a significant share of boom-time property purchases, and where increases have soared for years, Berson believes there is a good chance of declines in average home values. San Diego and other parts of California, along with large areas of the Sunshine State (Palm Beach, Broward and Miami-Dade counties, but not the metro Orlando area) were among those singled out.

– The weakest link in the housing market, in Florida and elsewhere, is the condominium sector. Many markets are glutted with unsold inventories of new and condo conversion units already, and significant price corrections could be just over the horizon.

What these remarks mean for you:

Neither Berson nor Bernanke predict widespread property value declines as part of the current down cycle. Only in markets where speculation has been rampant in 2003-05, and where job and population growth are anemic (see parts of the New England market) are there risks of price declines.

Analysts do not expect Florida home loans to rise significantly in rates, compared to where they are right now — and that’s still on the low end by historical standards. As long as financing is available and affordable, buyers will find a way to purchase houses, even at high prices.

A flattening market means changing one’s tactics, though, not hibernating until the market warms up. For sellers, that means getting acquainted (or reacquainted) with the dearth of selling strategies developed during down periods (or pretty much, any time before 2000, when the boom began and houses flew off the market in mere hours, often in bidding wars).

For example, they should consider seller financing, where the seller takes back a second note on concessionary terms to push the sale, or takes back a first note if they can afford to, or buys down the purchaser’s interest rate to help lower monthly payments. Experienced real estate brokers can fill you in on this and other strategies, along with the pros and cons.

There’s also the matter of pricing realistically to sell your property now, not five months from now. For prospective buyers, down markets often offer exceptional opportunities to acquire real estate at prices and on terms unthinkable just a few years before. Again, the message is to do your research, scour the market for properties that may never be cheaper, or even available.

So adapt to the changed conditions. Work a little harder. Then everything will be alright.