 Market Report: September 2006
Dear Friends:
It appears the Fed is through punishing us for our wretched real estate behavior. Buyers are still firmly ensconced in the waiting room but sooner or later they will get worried that the train will leave the station. There are bargains around but I am not sure how long that will be true.
--Jim
The State of Affairs
Traditionally fall is the second best time of the year to sell real estate. 2005 was an exception. Given that a nine-year rally was just about finished, perhaps last September’s anomaly should have been expected. This month will speak volumes about market prospects in 2007. If buyers remain curious but indifferent, a solid recovery may be eighteen to twenty-four months away.
There is a surfeit of bad and often conflicting economic news about housing. For example, most of the usual suspects are behaving well; interest rates, supply (except for urban condominiums), jobs and the local economy should not be cause for alarm. Even sales volume, while tepid by standards of the past decade, is within historical norms and is decent enough. Prices, while flat and tilting lower, do not appear to be poised for a free fall as we witnessed in mid-1991.
I know my fellow agents often fret about what they perceive as near-hysterical real estate reporting by the local media. While it is true that the local paper seems to relish reporting declines in prices in huge print above the fold, it is just the messenger.
I do not blame our media’s coverage as they are reporting old news. The market was already beginning to correct long before that latest round bursting bubble stories. Consumers always vote with their feet as seen in the last three real estate recessions. Sales volume always turned south long before prices caved. If you were paying attention to the rate of sales in mid-2005, you could have seen this coming. The buying pool had already made up their minds months before reporters turned on the spotlight.
Deciding to commit to a real estate purchase is generally a carefully considered decision and driven more by economics and need than newspaper stories. People will overhear a stock tip at a party and call their broker the next day—but this is not the character of the property market. I am not dismissing the effect of the press on our collective psyches but I think those stories just reinforced personal anecdotal evidence.
Running on Empty
Here is what I see. First, people have run out of purchasing power. Rising rates and prices coupled with stagnating wages have ended the party. No jawboning by the media or real estate professionals is going to alter the basic economic mechanisms that drive markets. Buyers are, for the moment, out of money. This is evidenced, for example, by recent reports of declining sales of mid-level and up-scale stores. Starbucks is having a tougher time selling four-dollar coffees. Another example can be found in the vintage car market. Prices are softening and collectors are less inclined to pay $200,000 for a forty-year old Plymouth. Americans are not feeling as rich as they were a few years ago and consequently are spending less. Which is exactly the behavior the Fed is trying to encourage by making money more expensive---particularly with the consumer’s favorite piggy bank, home equity credit lines.
Second, momentum players left the market about a year ago. This is most evident in the two-to-four unit marketplace and in urban condominiums. As rentals these products all lose money monthly but investors purchased them based completely on an expectation of future appreciation. (House buyers do this as well, but there is the all important utility of having a place to live that has real value, not unlike a larger apartment building that earns income) Those still in this game who failed to get out early enough need to be exceptionally patient with their investments. Both of these markets will recover when there is a whiff of appreciation in the air but for now these investors are MIA. When these buyers left the market their absence as buyers and, more importantly, their presence as sellers dealt a twin blow to the market.
Have the Police Left Yet?
It hard to imagine that the Fed will alter their course over the next year. Lyndon Johnson, as I am wont to remind readers, was partially responsible for the period of double-digit inflation (and recession AKA stagflation) that dogged Presidents from Nixon to Reagan. LBJ’s decision to fight a war on credit and the quadrupling of oil prices, following the 1973 Mid-east war, set in motion inflationary forces which were curbed only by twenty percent interest rates. The new chair of Fed will not want to repeat the mistakes of Arthur Burns, President Nixon’s Fed chair, who under reacted, or those of Paul Volker, who perhaps over reacted. The Board has left rates alone for two meetings and that bodes well for housing in 2007 and 2008.
We have now come full circle and are engaged in a war that is being waged on credit. Mr. Bernanke must navigate some exceptionally tricky waters to avoid the shoals of recession or stagflation. If he succeeds, Fed policy will again favor housing, and the national and local markets will rebound. For now the Chair is not losing sleep over problems in housing but rest assured he is keeping a watchful eye. He knows real estate-related business activity has been a major contributor to the nation’s economic growth over the past ten years. (Housing and related activities make up about 13% of our region’s economic output.) But it is possible that be no amount of Mr. Bernanke’s skill will surmount economic factors now in place and the Chair will not have enough maneuver room to help the housing sector. It will be a bumpy ride going forward but I think the correction has at the outside about thirty-six months to go and given the latest pause by the Feds, there will be no bursting bubble.
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