Timing the Real Estate Market: Can It Be Done?

What is the housing market like in your area?

If you live in Palm Beach County, we pretty much know the answer to that. In fact, data suggests that the recent drop in housing that is making all the headlines across the U.S. is actually very localized. The National Association of Home Builders report that certain regions, such as the South, are still showing positive growth in housing starts. On the flip side, previously sizzling areas like Las Vegas are heading… well, south. In a hurry.

John Burns Consulting, a housing research firm based in Southern California, presents some interesting figures on recent housing market dips over the last two decades. The company analyzed the past four major housing slowdowns in terms of the average drops in home prices (by percentage) and the average number of months between the peak and the bottoming out of the market.

The analysis suggests that, in terms of home prices, the depth of the bust is nearly upon us, but not the length.

1988-91:
65 percent price decline from peak to bottom
25 months from peak to bottom

This period was a hard landing for the housing market, with many companies going out of business. The reasons for the severity of the decline were primarily:

• Widespread job losses and prolonged unemployment, particularly in the California and parts of the South Florida housing market.
• A government-induced housecleaning of the savings and loan industry, which had been providing most of builders’ capital
• Speculator-driven price appreciation that resulted in housing affordability problems for millions and horrific consumer confidence levels all around.

1993-1995:
46 percent price decline from peak to bottom
16 months from peak to bottom

1998-2001:
40 percent price decline from peak to bottom
35 months from peak to bottom

In both of these two cycles, rising mortgage rates resulted in the decline, and the market experienced a soft landing. The job losses in 2001 were primarily confined to the Midwest and a few technology-dependent markets, such as California’s Bay Area and surroundings.

2005- :
42 percent price decline… so far
12 months from peak… so far

So far in the current cycle, despite all the panic, we are seeing signs of another soft landing, at least nationally. Significant price appreciation from 2002-2005 was driven by both speculative investors and homeowners, followed by rising Florida home loan rates, have created vast affordability problems.

Yet the job market and consumer confidence are holding up just fine so far, leading experts to believe that consumers will come back to the market return once interest rates stabilize and the investors have exited the fiasco.

How long this will take is hard to gauge, but in all likelihood, there is simply too much inventory for the recovery to occur anytime this year.

The softness of the landing will probably vary by market and even sub-market. Most builders still making positive profits, there is nothing wrong with the economy, and job growth looks solid for the most part. However, each market has its own issues that need to be worked out, including:

1. New home supply. In some markets, there is an abundance of new construction in the peripheral areas. That could drag values down.
2. Resale supply. Most markets are seeing an oversupply of resale listings, likely to be exacerbated by an almost certain increase in forced sales due to shifting adjustable-rate mortgages.
3. Affordability. Certain markets were flooded with speculators, and in their wake will likely be problems buyers will have to deal with for years to come.
4. Demand. Losses of jobs in the Midwest, a stagnant economy in New England, and several other markets have become problems, but job growth remains strong in the major housing markets of the South and West.

Basically, the length of time that it will take to work through these issues is impossible to forecast. However, if the Federal Reserve maintains positive job growth of 1.5 percent or more per year and can keep Florida home loans from rising too much higher, the local housing markets (some of the nation’s most volatile) should return to normal once resale supply returns to a normal level. Phew!