Fear of a Major Thud: How Hard Will Housing Market Land?
Talk to a dozen Florida mortgage brokers and these experts may give you a dozen different opinions about the state - and future - of the housing market. There’s no definitive way of knowing how the area will recover from the latest downswing in sales and demand.
Many insiders are hoping for a soft landing, but signs also point to this slowdown being stronger than originallyfeared. For example, in June, total single-family home sales fell 8.7% from a year earlier, to an annualized rate of 6.9 million - the sharpest year-to-year drop since April 1995.
Despite this figure, June’s rate of home sales was 40% above the 20-year average. The numbers can go back and forth, causing confusion among those trying to predict where real estate is headed.
How housing affects the economy
There’s little doubt, says Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, that the current housing market will have a negtative effect on the economy. He estimates that when people take cash out of their homes through Florida home equity loans and refinancings - which they were doing at an annualized rate of $558 billion in the first quarter - they tend to spend about 50 cents of every dollar.
If house prices merely stabilize, people’s diminished ability to use their houses like automated-teller machines would subtract about 0.75 percentage point from annualized GDP growth in 2007.
Another question is how quickly home sales, and consequently home building, can fall. Even after the second-quarter decline, investment in residential construction accounted for about 6.1% of the economy - close to a 50-year high. If, as some economists expect, housing investment merely returns to the long-term average of about 4.6% over the next two years, the decline also would shave 0.75 percentage point from annual real GDP growth.
The following chart attempts to forecast the upcoming state of housing. Fortunately, Florida mortgage rates did not rise with the last Fed meeting, but if they do increase down the line - and prices become less inflated - sales may decline even further.
