FRONT LINES: Economy

BY DAVID LEREAH

Turnaround hinges on pricing

Today’s home sales slide is something of an anomaly, since past housing downturns have been fueled by big hikes in mortgage rates and economic slowdowns. We have neither of those today; what we have instead are nervous consumers. Home values got high, affordability deteriorated, and buyers lost confidence.

Once property prices come down to more suitable levels, households and investors should get back into the real estate game.

That might not be too much longer.

Price growth (year over year) turned negative in the West and Northeast in July, and nationally in August. With luck, eased price increases will continue for the balance of 2006. If they do, we might find that the decline in sales bottomed out in July.

That makes prices key. Sellers need to abandon unreasonable expectations about the value of their home. After all, most home owners have enjoyed substantial equity gains on their property during the real estate boom years. Cutting prices by 5 percent or 10 percent won’t wipe out those gains.

Those of us involved in the real estate profession find ourselves in the unlikely position of favoring price softening. Practitioners are asking, or pleading with, sellers to accept market realities and reduce their listing price.

The housing sector and the U.S. economy need home-sale transactions more than home-price appreciation. Every time a home is purchased, other industries, such as furniture and appliance makers, are positively impacted. Economists call this the “multiplier” effect. You purchase a home; you then need to purchase furniture, appliances, and so on.

In fact, a healthy housing market impacts about 20 percent of the U.S. gross domestic product.

Any short-term pain from slower home-price appreciation will be more than offset by sales gains. Once sales pick up, housing inventories drop. That places welcome upward pressure on home prices once again. And the cycle of life in the real estate markets as we know it continues.

Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

Brokers: Would you like to track how well your sales associates are meeting clients’ expectations? The NAR Research Group is rolling out an e-mail customer satisfaction survey you can send to your clients immediately after closing to gauge their satisfaction with your services. Keeping your results confidential, NAR will track the responses in aggregate to measure trends in industry-wide satisfaction and send you specific results for just your company. There’s no cost to you. Look for details on how to participate at REALTOR.org/research.


The U.S. population will hit a landmark 300 million before the end of 2006, the U.S. Census Bureau says, just 91 years since it hit 100 million. For real estate, the changes over those years are significant. For starters, the price of a new home has climbed almost 9,000 percent.

Business Confidence

More inventory softening seen
Practitioners expect to see seller traffic increase in the months ahead. There’s little expectation that buyers will return to markets to balance out the increase. Expectations for the months ahead continue to slide. (However, the pending-home sales indicator below shows near-term future sales improvement.) Practitioner confidence was surveyed in September and looks ahead six months.




Results are based on 434 responses to 3,000 surveys sent to large and small real estate offices. The survey asks practitioners to indicate whether conditions are strong (100 points), moderate (50), or weak (0). Responses are averaged to derive results.

Home Sales

Gains projected
An upward shift in NAR’s leading home-sale indicator points to a pick-up in transactions in the months ahead. Total existing-home sales, which include single-family houses, town homes, condominiums, and co-ops, dropped by a scant 0.5 percent in August to a seasonally adjusted annual rate of 6.30 million units from a pace of 6.33 million in July. The August pending home-sale index, which was up to 110.1 from 105.6 in July, suggests the worst of the sales easing might be over.




*Seasonally adjusted annual rate, which is the actual rate of sales for the month, multiplied by 12 and adjusted for seasonal sales differences.

Find current economic data at REALTOR.org/research.