The inexorable growth of housing prices is set to continue
Having survived the flack from the proponents of the housing bubble thory, David Lereah once again came out victorious last week. With all the data pointing to the contunuation of the housing boom, there was no hope for those who wanted to buy a house for anything less than the grand total of all their possessions.
"Existing-home sales for 2006 are expected to come in at 6.50 million, the third highest on record, with a total of 6.42 million seen in 2007. New-home sales in 2006 should tally 1.06 million, the fourth highest on record, with 957,000 projected this year.
Total housing starts for 2006 are likely to be 1.81 million units, with 1.51 million forecast in 2007, which would be the lowest level in a decade. Builders are pulling back on new construction to support prices of remaining inventory.
The 30-year fixed-rate mortgage will probably rise to 6.7 percent by the fourth quarter of 2007. Last week, Freddie Mac reported the 30-year fixed rate at 6.18 percent – far below earlier consensus forecasts. “The current interest rate environment and housing inventory levels present a window of opportunity for potential buyers,” Lereah said.
The national median existing-home price for all of 2006 is expected to rise 1.1 percent to $222,100, and then gain 1.5 percent this year to $225,300. The median new-home price, after rising only 0.3 percent to $241,600 in 2006, is projected to grow 3.0 percent in 2007 to $248,900.
“With all the wild projections by academics, Wall Street analysts and others in the media, it appears that much of the housing sector is experiencing a soft landing,” Lereah said. “Despite the doomsayers, household wealth will not evaporate and the economy will not go into a recession. If you’re in it for the long haul, housing is a sound investment.”
As I pointed out many times in the past, having a substantial and lasting decrease of housing prices is about as likely as meating a dinosaur on the streets of Manhattan. What was remarkable about Leareah's speach, however, is how low he decided to set the plank. It must have been pretty obvious to NAR professionals that existing home prices are definitely set to rise much more than 1.5% in 2007. By setting his target so low, Leareah virtually locked in a nice 2008 New Year present for himself, making sure that he would beat expectations by an impressive margin.
The actual reason for the resumption of growth is that there has never been any reason to stop buying real estate in the first place, apart from the psychological tug-of-war between buyers and sellers that at one moment appeared to give buyers a chance to get in at a small discount. Anybody who traded stocks knows that buyers will wait on the sidelines whenever there is a perception that some good, solid dividend-payer returning 10% a year might soon get a 5% haircut. On the stock exchange, this creates fascinating falling-knife scenarios when you can get a 20% discount on a fundamentally good stock just because nobody wants to buy it before it has bottomed out. With real estate, buyer strikes never have that effect because anxious sellers who could drive down the price never materialize, but it does create periods of weakness that can last from 6 to 12 months. However, the housing perma-bears would do well to avoid the fundamentally wrong conclusion that buyer strikes mean a perpetual loss of interest in the given asset. Just as big institutions that are waiting to get a discount on a stock are all the while fully aware of the stock's true value, so real estate investors are fully aware of the wealth-creating potential of housing even today, at the beginning of 2007. Therefore it is only a question of time when investors see the resumption of the trend and prepare for the second leg of the housing rally.
The fiscal policy also helped. While the money supply has been growing very conservatively (M2 growth was merely 2% or 2.5% higher than the official inflation), Bushenomics ensured that whatever new money is pumped into the economy first passes through the hands of people whose preferred use of money is investment rather than consumption. This means real estate. Competition from the stock market has been insignificant as the returns remained relatively low, making it unprofitable to buy stocks on margin. This resulted in the traditional balanced arrangement where hard cash is invested in stocks, and mortgage loans are obtained against the stock equity. And, of course, mortgage rates remained as low as they needed to be. Stupid questions like "what happens if the Fed decides to hike rates?" have been met with the expected an entirely self-obvious answer: "why would the Fed do such a thing?".
With buyer capitulation imminent, the last subjective factor that held the the housing rally in check during 2006 will be gone in a matter of few months, if not weeks. Given that all the objective factors - artificial shortage of housing, demographics, monetary supply, investment potential of real estate, loan rates, increasing equity of households, falling dollar, and, last but not least, the central role of housing as the main (and only) GDP growth vehicle - are still in place, I predict that price appreciation will easily exceed Leareah's numbers. Even if we don't see 10% growth this eyar (which seems to me the most likely), I am hard pressed to suggest any number below 5%. Welcome to the second stage of the housing bubble.