THE NATION’S HOUSING
Sunday, July 30, 2006
KENNETH HARNEY
David Berson, chief economist for mortgage giant Fannie Mae, said that one of the few immutable laws of economics is “Unsustainable trends eventually come to an end.”
And the end of the housing trend is pretty much where we are.
Ben Bernanke, chairman of the Federal Reserve, was more opaque. He told Congress, “The downturn in the housing market so far appears to be orderly.”
In classic Fed-speak, Bernanke managed to simultaneously soothe — and unsettle — his listeners. An “orderly” realestate downturn sounds OK, right? But what about “so far”? What does that mean in practical terms for people who need to sell a house in the coming months? And what about buyers? Could the property they buy be worth less in a year?
Part of Bernanke’s job is to avoid specific predictions at all costs. But top housing economists such as Berson are paid to make projections, and he offered them July 20 in a midyear forecast teleconference with Wall Street analysts.
Berson thinks that the Federal Reserve “is not done tightening” the ratchet on interest rates and will move up short-term rates again in August. After that, rates are likely to stabilize, bringing at least a temporary cessation to rising home mortgage rates.
He expects average homeprice appreciation, which had been running at a double-digit annual clip nationally for the past year, to drop to 3 percent or less by the end of the year. (On this point, Berson is more bearish than most of his housingand mortgage-industry colleagues, who project average appreciation in the 4 percent to 6 percent range.)
If investors dump rental houses and second homes purchased during the boom years onto the market in larger-thanexpected numbers, Berson thinks price appreciation could drop to a 1 percent or 1 1 /2 percent annual rate — a level not seen since the recession of the early 1990s.
In a handful of markets where investors accounted for large shares of boom-time property purchases and price increases soared for years, Berson thinks “there is a good chance of declines” in average home values. Although he avoided naming all of the markets that Fannie Mae worries about, he did identify San Diego, parts of California plus large swaths of Florida “but not Orlando.”
Like many analysts, Berson said the weakest link in the housing market — and the most vulnerable to price declines and investor dumping — is the condominium sector. Many markets are glutted with unsold inventories of new and converted condo units, and Berson is concerned that significant price corrections could be just over the horizon.
What to make of such sobering projections? Here are a few thoughts.
• Neither Berson nor Bernanke foresees widespread property-value declines as part of the current down cycle. Only in those markets where speculation was rampant from 2003 to 2005 and where job and population growth are anemic are there risks of price declines.
• Neither expects mortgage rates to rise significantly higher than today’s rates, which are still on the low side by historical standards. As long as financing is affordable, buyers will find ways to purchase houses.
• For all-weather real-estate players, a flattening market means changing one’s tactics, not burrowing away to hibernate until the market warms up. For sellers, it means getting acquainted (or reacquainted) with the toolbox of techniques developed during the down periods of the 1970s, ’80s and ’90s — for example, seller financing, where you take back a second note on concessionary terms to push the sale, take back a first note if you can afford to, or “buy down” your purchaser’s interest rate to lower monthly payments. Real-estate brokers can fill you in on these strategies along with their pros and cons.
For buyers, down markets often offer exceptional opportunities to acquire real estate at prices that were unthinkable just a few years before. Again, the message is: Don’t go to sleep. To the contrary, get off your duff and scour the market for properties that might never be cheaper or even available.