The Big Picture - Our National Housing Market and Economy

It has been almost 6 months since I sat down and last discussed the market with you.  2006 has been an eventful year with the Iraq War and soaring gas prices.  Yet with all these things happening and more, the subject of the Housing Market has remained big news.  The Housing Market, indeed, is a big influential player in our national economy.  Home ownership is and has always been a key component of the American Dream, making the housing market, the affordability issue, and interest rates subject matter that affects our daily lives.

The Gold Rush of the New Millennia as I like to call it, has for the time being taken a break here in the Golden State.  Favorable tax legislation, creative high-leverage loans with low interest rates, large numbers of willing move-up buyers, first-time buyers and first-time investors all fueled this fever.  Real Estate as an investment tool really took hold as a viable option strategy to traditional stocks and bonds.  California was hard hit.

In the broader outlook Holiday sales have been strong with the exception of big ticket items.  The employment numbers are good despite the absence of any significant income gains.  The cost of building materials is down which may give way to an increase in remodeling and home improvement in the spring of 2007.  This may influence some buyers and sellers to stay put.

I dont think buyers have disappeared so much as they are taking a time out to observe and take in what is happening around them.  You must agree that it takes a little time to figure out and understand.  People may be in a state of disbelief and confusion as so many have been staking there fortunes and future on real estate and the rising market.  Personal wealth and fortune have been challenged.

 First-time buyers are still in the wings but many are waiting for the market to bottom out.  Rising interest rates which peaked in July before the Fed halted incremental increases in August have improved and remained calm and much lower than the anticipated 7% mark that some analysts expected by the New Year.

Interest rates will be a key component to watch.  If money becomes too available, once again, that could have an upward nudge on home prices if buyers respond and distinctly reappear to the market.  Local states and area market situations will vary.   

Historically, recession follows a sharp housing downturn.  The Associated Press gathering from its sources, however, states this to be about a 20% probability.  The Federal Reserve adjusts accordingly, lowering its rate when in a recessionary cycle (2001-2004) or raising its rate to prevent inflation when the economy is over-heated or in a growth cycle.  The Federal Funds Rate is the overnight rate at which banks lend to each other, though much lower of a rate than we as consumers see it is, nevertheless, the benchmark for those rates.  Most economists predict a 2-3% economic gain in 2007.  This borders on recession.

The National Association of Realtors reveals the following:

        New home sales were down 17.7% in 2006.   Anticipated new home sales will be down 9.4% in 2007.

        Resale home sales were down 8.6% in 2006.  Anticipated resale home sales will be down only 1% in 2007.

To look at it another way, Moodys Economy.com, which is a private research company, has predicted that the median resale home price in America will fall by 3.6% in 2007 which will represent the first such drop since the Great Depression.  Some say this will be the end of the downturn, while others believe that it is only the beginning.

Not all states are suffering the same fate.  It seems that many of the over-heated markets are taking the biggest hit and California is at the top of the list.  Some states such as Washington, Texas, New York and Tennessee, to name a few, are still experiencing growth and price appreciation.

The 2007 Housing Market will be inextricably linked to the rate of economic growth.  The Feds will respond to these indicators as necessary with rate adjustment in attempt to balance the threat of inflation or recession.  The Middle Eastern conflicts and the war in Iraq could shake up oil and energy prices once again and strain consumer spending needed for economic growth.  2007 clearly looks to be a year for adjustment and correction before we can claim recovery and balance to the Housing Market.