NAR news: Making a correction
By Lawrence Yun,
NAR Senior Economist
The word “correction” is a misnomer applied all too frequently in a misleading way. What homeowners and homebuyers are monitoring is principally where home prices have been and where they are headed.
Nationally, the median home price rose one percent last year – that on top of the 53 percent rise during the five-year boom from 2000 to 2005. This year, the national median price is expected to fall one percent. By any standards, it is an extreme stretch to call it a correction when a particular asset price rises better than 50 percent and then retreats one percent. Even a relatively large price decline of 12 percent in Sarasota cannot reasonably be considered as a correction when its local market had a 150 percent price increase during the boom. Let’s see...that is 150 steps forward and 12 steps backwards.
Each market is unique
Yet, consumers are exposed to constant pounding of correction, implosion, recession, and other negative words when discussions of the housing market arise. Against all that doom saying, naturally consumers would pause and step away from buying a home. Even in places like Columbus, OH – a market where prices have only modestly risen and what no sane economists would characterize as being in a bubble -- buyers have pulled back due to constant negative messaging from the media. Many REALTORS® have relayed stories of a buyer prospect who decided to not purchase because of a headline of a housing market collapse in a national newspaper. This is irrational -- there is no bubble in Columbus! Or in Kansas City or in Houston. The latest median local prices in these markets were around $150,000. Anyone with a good credit history and a middle class job should have the means to purchase a home (though perhaps not the dream home).
Think also of the buyers who got priced out when mortgage rates were rising, yet refused to re-enter the market when mortgage rates were falling. Consider this – mortgage rates averaged 5.8 percent at the very peak of sales activity in August 2005. Sales subsequently declined as rates moved up to 6.8 percent one year later. This is understandable. Higher rates mean fewer buyers can qualify. However, mortgage rates since that time have fallen - to 6.2 percent in the first quarter of 2007. But the falling rates have not attracted buyers back into the market. All the while, over the past year-and-a-half, the economy added 3.5 million net new workers with wages having risen by six percent. So we have plentiful more jobs at higher pay and similarly favorable mortgage rates, yet home sales are down by 15 percent from the peak. Buyer confidence has simply disappeared.
Sales volume -- NOT prices
The correction is occurring not in home prices but in sales volume and new home construction. Yes, home sales are down -- perhaps worthy of the word correction or recession. Yes, new single-family home construction fell more than 35 percent from peak to trough. And yes, construction jobs have been slashed and REALTOR® income has fallen. And yes, profits are falling for homebuilders and mortgage lenders. So from an economic impact and income generation, there is clearly a housing market adjustment. Workers and companies in the industry are being impacted.
Stock market transaction volumes are not that critical to stock market investors. Falling sales volume in New York Stock Exchange does not imply a stock market correction. Investors, rather, focus intently on the stock price. Housing wealth accumulation prospects should and would be the focus for homebuyers, too. Unfortunately though, today’s homebuyers are instead bombarded with the negative sound bites of RECESSION, CORRECTION, and IMPLOSION when the matter of housing shows up in the media without the distinction whether one is talking of home price (which has been either positive or minimally negative depending upon local markets) or of sales volume change or homebuilder’s profits (which has been falling but not of importance from consumer’s point of view).
For the record
There is indeed a recession in terms of construction activity, construction jobs, and falling sales. But there is really no HOME PRICE recession/correction/implosion. REALTORS® should set that record straight. REALTORS® should also discuss the one consistent proven way to accumulate wealth over a long-period -- the one through homeownership. The net worth for a typical homeowner is $184,000. The net worth for a typical renter is about $4,000. That is a something that all REALTORS® should be discussing with their buyer prospects.
Reprinted from the National Association of REALTORS® RE Insights at www.realtor.org/reinsights.nsf. |
