Explanations of the market slowdown

The real estate market has slowed down considerably over the past year, which is no secret.

But why is this happening. There are obvious and less than obvious reasons for this downturn.

The article, “Full House,” printed in the August 30, 2006 edition of The Wall Street Journal, written by Karl E. Case and Robert J. Shiller, explores the reasons behind the sudden fall of the real estate market.

“Looking back at past housing booms, the first sign of the end is when a goodly share of buyers stop making offers and eventually stop looking, seeming to just disappear. In the spring of 1987, during another U.S. housing-market boom that was starting to lose speed, Nora Moran, president of the Greater Boston real estate board, said ‘someone blew a whistle that only dogs and buyers heard.’”

Today’s market is following the 1987 pattern. New home sales in July were down 22 percent from its year –over-year sales in July 2005. The Northeast alone was down 43 percent over that same period, while the inventory of unsold, listed new homes is up 22 percent.

“Existing home sales are down to 6.33 million in July from over seven million at the end of 2005. Older boomers are cashing out of valuable suburban homes and heading for condos in the city, or out of high-priced regions altogether.”

Why is this happening? Interest rates can not be solely responsible for the sales decline. For example, the interest rate on the 30-year mortgage is up less than one percentage point from this time last year and is comparable to the rate offered a couple of years ago, when the market was booming.

“Talk is part of what changes the mood and actions of buyers, and the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America have heralded the bursting of the ‘housing bubble.’”

Another reason people are overreacting to the market slowdown is because the housing “boom” over the past couple of years had such a magnitude, it became center focus in national news and water cooler talk.

Now that rates and prices are settling back towards normal levels, people don’t know how to react. Professional, experienced investors knew this would happen, while amateur investors probably bought too much because they thought the “boom” would last forever and they are now stuck with high monthly payments from extra properties they are unable to sell.

But probably the main reason the market is sliding is because buyers are waiting for prices too fall.

“While our surveys indicate that relatively few expect prices to actually fall, buyers do not want to pay prices that are significantly higher than a year ago. Buyers are waiting and low-balling. Sellers want to get a price increase of the kind they've observed in the recent past. The result is that fewer agreements are reached, and sales fall. If the housing market was like the bond market and all houses for sale were auctioned every day, prices would indeed fall precipitously. But they are not. The aggregate indexes based on repeat sales have decelerated markedly but are not yet falling.”

The two sides (buyers and sellers) are struggling against each other right now, resulting in a drastic decline in home sales. Once one side gives, the other will take advantage.

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