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A Tale Of Two Markets

Two different reports out recently from the housing industry could easily leave homeowners from the pricey coasts to under-priced Middle America scratching their collective heads. Economists at the National Association of Realtors declared “stabilization” in the housing market, while the National Association of Home Builders warned of “continued challenges ahead.”

The differences between the two trade groups could explain some of the discrepancy, since one focuses on existing homes and one on new homes, but given that sales of new homes are often dependent on the sale of a potential buyer’s existing home, the economists who work barely half a mile from each other in downtown Washington D.C. just can’t be that far apart.

“Essentially, we see that the existing-home market is stabilizing in a broad cyclical trough and moving in the right direction,” says Lawrence Yun, NAR senior economist.

“I certainly do not see the housing market stabilizing now, no question. It’s still eroding. By the way – the pressures on pricing will be downward certainly through the year, the beginning of ’08 at least,” counters Dave Seiders, chief economist for the Home Builders.

On the side of the realtors, existing home sales are up 2.4% in the first quarter of 2007 from the last quarter of 2006, but still down 6.6% from one year ago. Prices continue their slide down from a year ago, but the realtors note the slide is less steep than it was in the last quarter of ’06.

On the other side of the map, home builder confidence is at a 16-year low, and the U.S. Commerce Dept. reports that the number of new building permits issued dropped nearly 9% in April, as builders struggle to get themselves out from under heavy inventories.

“I think the key thing for our industry is to try and get supply and demand into some kind of equilibrium and so by reducing the number of starts that's really going to help long term on the recovery for the housing market,” says Doug Smith, of Washington DC-area builders, Miller & Smith.

Smith has cut his inventory of so-called spec homes -- homes without a buyer already under contract -- in half since last year. His sales are down 25% from a year ago, but the Washington D.C. market is coming back faster than others, and he’s hopeful.

“I think Washington led the industry into the downturn, I think we slowed down before everyone else did, but more importantly I think job growth here really continues to be at healthy numbers,” says Smith.

"While the D.C. market is seeing an upswing in sales, up 9.3% from a year ago, other major metros that led the fall in housing, are still struggling. In Florida, sales are down 25% from a year ago, and in California, sales are down nearly 14% from a year ago. Major cities in those two states saw an influx of investors/speculators during the boom, who have now all but deserted the housing market. Properties, for sale and for rent, are at record levels.

“It’s both – this sort of newfound weakness of demand coupled with still a worsening inventory situation. Those vacant units on the market – first quarter numbers were up again from late last year – running record levels of vacant units, for sale, and for rent – and they can move across the markets.”

Many thought that the housing market had hit bottom last fall. In fact, the National Association of Home Builders confidence survey hit a low last September and began to climb back up toward the end of the year. Cancellations were also easing around the turn of 2007. But this week the confidence survey was back down again to September’s level, and cancellations are rising again, thanks to trouble in the subprime mortgage market that led to stricter lending standards across the mortgage landscape.

“The cancellation rates, that’s actually part of the hidden inventory out there of houses. They’ve already been counted as home sales and starts, but they’re just sitting there on the books,” says Dirk van Dijk at Zacks Investment Research. Van Dijk expects to see the home ownership rate fall over the next few years, as more and more borrowers are priced out of the mortgage market.

And while the subprime story may have fallen off the front pages these days, trillions more dollars worth of loans will be resetting over the next several months, pushing more and more Americans into foreclosure. This week the chairman of the Federal Reserve, speaking at a Federal Reserve Bank of Chicago conference, said: “Although a leveling-off of sales late last year suggested some stabilization of housing demand, the latest reading indicate a further step down in the first quarter.”

Chairman Bernanke blames the rise in subprime lending for much of the pain in today’s overall housing market, and while detailing all the antidotes federal regulators and industry leaders can take to avert another crisis, he added, “curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters.”

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