REALTOR® Magazine-Daily News-Combat Market Fears With Local, Long-Term Data

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Daily Real Estate News | May 18, 2007 | Combat Market Fears With Local, Long-Term Data
WASHINGTON – National media coverage of sluggish real estate markets has sapped buyer confidence, despite the fact that severe declines have been confined to a limited number of markets and other economic factors, including wage gains, are favorable.

That means it’s up to individual real estate practitioners to show consumers that the national story probably doesn’t mirror their local realities, said Lawrence Yun, senior economist for the NATIONAL ASSOCIATION OF REALTORS®. “Consumers have to get the message that all real estate is local.”

Yun noted that while some markets such as Florida and Arizona have seen home price declines of 25 percent in the last year, other areas such as New York City and Los Angeles are experiencing price increases. An area’s job strength, building constraints, and population growth matter much more to local home prices than national data, he said.

“Nationally, housing prices have increased by 50 percent in the last 25 years,” Yun said. “So we’ve taken 50 steps forward and only one step back.”

To lessen the effect of bearish real estate reports, follow Yun's advice:

Give your customers long-range statistics, which demonstrate less volatility than short-term stats. For example, talk about months’ supply of inventory rather than days on market. (Another issue, says Yun: Some MLSs allow members to change days on market, so those statistics may not be reliable.)

When making price comparisons, use year-over-year data. It’s less volatile than month-to-month price differences. Also keep in mind that seasonal fluctuations are standard and not an indication of a decline. Home prices are almost always higher in summer than in winter, he said. Families with children tend to sell in summer, and they tend to have larger, more expensive homes to sell. So a winter price decline isn’t a sign of the market crashing.

Note that past significant U.S. home price declines have been tied to prolonged job losses, such as what occurred in the late 1980s and early 1990s. Today, the only markets seeing big job losses are Detroit and Cleveland. The top-three cities for job creation: Dallas, Houston, and Phoenix.

Point out that although there’s record-high debt, there’s also record-high equity in the United States. In the aggregate, people have the equity to support their debt.

Explain that the subprime situation is a manageable problem. Out of 110 homes generally, 33 are owned free and clear and 77 have mortgages. Of those 77, 67 have prime or government loans and 10 have subprime loans. Of the 10, eight are current on their payment and two are delinquent. Of the two, at most one would go into foreclosure in the aggregate.

Signs of Recovery

Yun said he expects sales to fall to 0.86 million in 2007 from 1.05 million in 2006, but he says there are already signs that recovery is beginning:

Rising rents, which are escalating at about 4 percent a quarter, are making homeownership more attractive.

Investor buying, which fell some 29 percent in 2007, have largely worked out of many markets. A 33 percent fall in single-family home construction last year has helped hold down inventories. Vacation homes sales rose even in 2006 thanks to retiring Boomers and should continue to increase.

Condominium sales have also begun to rise slightly, after falling sharply. Mortgages interest rates remain near historic lows (approximately 6.4 percent in ’07), which makes the mortgage-obligation-to-income ratio very manageable in most markets.

Mortgage applications have also shown a recent jump, indicating that buyers may be gaining more confidence, Yun noted.

The Foreclosure Factor

One factor that’s slowed recovery this year has been rising foreclosures, particularly among subprime borrowers, said Yun. Falling prices are the main culprit, he said, noting that for every 1 percent decline in home prices, foreclosures rise by 70,000 in the United States.

However, subprime foreclosures, which reached about 4 percent in late 2006, have not trickled down to more traditional loans. Yun even believes that the Federal Reserve might lower interest rates in 2008 — a boon to those with adjustable rate mortgages.

“The fundamentals are there. It’s just up to real estate practitioner to raise buyers’ confidence and show them it’s a great time to buy real estate in most markets,” he said.

— By Mariwyn Evans and Christina Hoffmann for REALTOR® Magazine Online