Defining the Housing Market

Workshops approved by ERC for CRP™ Recertification Credits.

Moderator
Barbara Cox
Director of Marketing Communications
Atlas Van Lines, Inc.

Presenter
Jed Smith
Managing Director of Quantitative Research
National Association of Realtors

Barbara Cox, Atlas Director of Marketing Communications, introduced workshop presenter Jed Smith, Managing Director of Quantitative Research with the National Association of Realtors. Jed looked at the size of the U.S. housing industry and the magnitude of its recent downturn. In 2005, approximately 7 million houses sold. Right now, it looks as if this year's volume will approximate 70 percent of that. Prices are down and volume is down. But the data does not substantiate that a recession is taking place. Jed does not see a crisis; he expects a reasonable recovery to begin in the third quarter.

Jed explained that there is no such thing as a national housing market; rather, there are many local markets. Although median home prices are generally down, in some metro markets they are up. He contrasted three price indices: the Case-Shiller Index of 20 metro regions; the NAR Index; and the OFHEO (Office of Federal Housing Enterprise Oversight) Index.

The fact that sub-prime loans account for more than fifty percent of foreclosures is a problem. The sub-prime market was a gamble that did not pay off and led to major bank losses. No one yet knows the extent of the problem, and this impacts buyer confidence. He used the classic plot of a western movie as an example for what is taking place to calm the market. Like the guys who bring in a strong box filled with gold to thwart a run on the bank, the Fed is putting money into the system to stop a run on the people who are holding the paper. In other words, the economy is getting an infusion of liquidity. This may help address job losses, but it will have an inflationary effect.

According to Jed, several factors suggest the economy could go into recession for a quarter or two: rising unemployment, a roller-coaster stock market, a housing slowdown, credit crunch, falling consumer confidence, and inflationary prices as seen in the cost of oil. This particular speculative run-up should abate and prices are likely to return to around $80 per barrel.

Jed believes that current mortgage obligations are manageable. Historically, household income has averaged around 21 percent of home price. Now it is slightly less, and the data does not suggest houses are overpriced.

On the plus side, wage growth continues, corporate profits are near a record high, and the stock market reflects consumer confidence. Jed sees the core inflation rate (excluding food and oil) as reasonable. He believes increases in the price of oil are transitory. Consumer spending is weak but not negative. A weaker dollar is giving the U.S. a competitive edge in some industries and exports are growing.

Jed is bullish on 2009. The Fed has cut the interest rate and mortgage rates are down. There is pent-up demand for housing. The forecast for U.S. home sales is 5.38 million units this year for existing homes and 600,000 for new homes. However, Jed believes 2008 will be flat.

In closing, Jed discussed the "Cassandra effect." The prophetess could tell the future perfectly, but nobody ever believed her. He likened this paradox to the subject of economics. When things are going up, no one believes they will turn down, and vice versa. Jed remains reasonably confident; he is ignoring the Cassandra effect.