Friday, March 28, 2008

Risk Of Trying To Time The Bottom Of The Housing Market

All of us are concerned about the dropping house prices and are doubly worried, as the news seems to get worse as the months wear on. However, with all things, one must not lose sight of the long term - especially in real estate. One thing that an real estate old-timer will tell you is that real estate is cyclical, which means that prices will appreciate and then come down and then begin its cycle all over again. The only questions are how long between the up and down cycles and how much of the change.

One thing I thought it would be interesting to do is let the excerpts from the news articles of the period speak for themselves. We will start with a quick snapshot of where we are today and then go back to 1994 to 1997 and see what happened then. Finally, there is an article from Washington Post, written in 1996, that is appropriate even today.

So let’s take a look at history and hopefully we can feel a bit of comfort in seeing that what we are facing now is not much different from what happened in the past. And much like the past, we will see the real estate market rebound.

Where We Are Now
“Nationally, the median average sales price fell compared to last year, down nationally by 4.65%, to a median average of $201,100. The Midwest showed the smallest decrease, only 4.04%, followed by the South at 5.90%, and the West decreased in price by 6.69%. The aberration in the median sales price showed up in the Northeast, which was up substantially, by $15.900 and 3.12%, to $270,800. Do not trust those figures for the Northeast. 2007 is the first year that median prices declined nationally since the National Association of Realtors began keeping records in the early sixties.”

A Look Back At The 90’s -- Letting History Tell Itself
January 4, 1990 - The Atlanta Journal and The Atlanta Constitution
Sales of new homes surged 9.6% in November; Average price in U.S. reaches $155,900
WASHINGTON – “Led by both a return to normalcy in earthquake-shaken Northern California and dipping mortgage interest rates, new single-family home sales in November rose a surprisingly large 9.6 percent to a seasonally adjusted annual rate of 710,000. The rate, announced Wednesday by the Commerce Department, was stronger than analysts had forecast and challenged the view expressed by some that the housing market has fallen on hard times.”

February 1, 1991 – Boston Globe
“Sales of new homes in the United States fell 17.5 percent last year to the lowest level since 1982, the government reported. Sales for the year totaled 463,000, according to a joint report by the US departments of Commerce and Housing and Urban Development, compared with 650,000 in 1989. The decline in the Northeast was 17.8 percent, from 86,000 sales in 1989 to 73,000 last year.”

January 1, 1992 - The Washington Post
“Leading U.S. Forecasting Index Fell 0.3 Percent in November; Lower Rates Fail to Spur New Home Sales
The nation's chief economic forecasting gauge suffered its biggest decline in 10 months in November while new home sales failed to improve despite the lowest mortgage rates since 1973, the government reported yesterday. The Commerce Department's index of leading economic indicators dropped by 0.3 percent in November, its fourth consecutive poor showing and worst since a 0.6 percent plunge last January. The decline followed three consecutive months in which it was virtually unchanged. The index, which is designed to forecast economic activity about six to nine months in the future, rose a scant 0.1 percent in October, slipped 0.2 percent in September and was unchanged in August.”

Jan 5, 1993 - Los Angeles Times
REAL ESTATE 3% Rise in Home Sales Seen for U.S. in '93, but Gains to Lag Here
“Richard J. Loughlin, president of chief executive of Century 21 Real Estate Corp., says he expects to see a nearly 3% increase in home sales across the country this year-to 3.7 million from 3.6 million in 1992.”

DECEMBER 30, 1993 – International Herald Tribune
Strong Data Point to a Good '94 for U.S. Economy
“A stream of upbeat U.S. economic statistics came to a climax on Wednesday with a fourth successive monthly rise in the government's chief forecasting gauge and a healthy gain in home sales. The index of 11 leading indicators, which is designed to predict economic activity six to nine months in the future, gained 0.5 percent in November, the Commerce Department reported. The National Association of Realtors said sales of existing homes increased by 2.9 percent in the month, to a seasonally adjusted annual rate of 4.21 million. This was the highest level since the association began keeping the statistics in 1968.”

Jan 23, 1994 - Los Angeles Times
First-Time Buyers Account for Majority of Home Sales
The median L.A. home price for first-time buyers declined from $183,600 in 1992 to $174,200 last year. For all L.A. buyers, the average home price fell 7% to $235,700 in 1993 from $253,200. Average monthly mortgage payment in Los Angeles was $1,335, the highest in the nation, but down significantly from $1,611 in 1992. The nation's lowest average monthly mortgage payment was $659 in Cleveland. Average monthly mortgage payments for all U.S. buyers dropped to $1,015 from $1,064 in 1992.”

June 1, 1994 – The Buffalo News
“Some economists are saying they see more declines in new U.S. single-family home sales, following weak April sales and amid higher mortgage rates. "The message is that the best sales pace is behind us," said Michael Niemira, an economist at Mitsubishi Bank in New York, in reaction to Tuesday's new-home sales report. The departments of Commerce and Housing and Urban Development said that new single-family homes declined 6.8 percent in April”

December 31, 1994 - ASSOCIATED PRESS
“Sales of new homes tumbled in November for the first time in five months, and analysts predicted further declines in 1995 as higher interest rates erode consumer demand. "It's clear this is the beginning," said economist David Lereah of the Mortgage Bankers of America. "The housing sector is slowing." Joseph Blalock, an economist with the Savings & Community Bankers of America, agreed”

March 30, 1995 – NY Times
“Sales of new single-family homes fell a larger-than-expected 14.0 percent in February to the lowest level in almost three years, even as mortgage rates dipped below 9 percent for the first time in four months.
All regions of the country reported declines. The largest came in the West, where flooding devastated communities in California and sales made their sharpest drop in 13 years.

"Builders have been telling us that higher interest rates are weakening demand, hurting sales and stamping out the housing recovery," said Jim Irvine, a home builder from Portland, Ore., who is president of the National Association of Home Builders.
Total sales decreased to a seasonally adjusted annual rate of 551,000 -- the lowest since April 1992 -- after rising a revised 2.6 percent in January, the Commerce Department said. A month ago, the Government estimated that January sales increased 3.8 percent. The outlook for the rest of the year is not promising, builders said.”

December 28, 1995 – Boston Globe
“The holiday season failed to cheer consumers, who bought fewer homes and were less exuberant about the economy, according to reports released yesterday. The numbers provide more evidence of a slowing economy, analysts said. Sales of existing homes nationwide dropped 1.7 percent in November from October, said the National Association of Realtors.”

April 29, 1996 – The Buffalo News
“Sales of new homes dropped 7.6 percent in March to the lowest level in 10 months as the housing market began to feel the effect of rising mortgage rates. The Midwest posted the only advance. The Commerce Department said today sales of single-family homes totaled 672,000 at a seasonally adjusted annual rate, down from a revised 727,000 in February. Many analysts had expected a 7 percent increase in March, believing buyers would rush to lock in mortgage rates that had begun to rise.”

December 31, 1996 - Bloomberg Business News
“Existing home sales in the U.S. unexpectedly rose in November, reversing a string of five straight monthly declines, and setting the stage for the first yearly sales total above 4 million. November's 1.8% increase in home resales reported Monday by the National Association of Realtors, combined with a report showing a small rise in the index of leading indicators, suggests the U.S. economy will continue its slow, steady growth, analysts said.”

February 5, 1997 - The Washington Post
“A small decline in new-home sales and other signs of a softening economy suggest that Fed policymakers, scheduled to finish a two-day meeting today, will be able to refrain from raising interest rates this week, analysts said. The Commerce Department said new-home sales fell 1 percent in December, to a seasonally adjusted annual rate of 783,000 units. But for 1996, sales climbed 13.3 percent, to 756,000.”

May 28, 1997 – Boston Globe
“Sales of previously owned homes fell 2.4 percent in April, the second monthly decline in a row. Single-family homes sold at a seasonally adjusted 4.06 million annual rate, down from a 4.16 million rate in March and 4.23 million in February, the National Association of Realtors said. Despite the two monthly declines, sales remained not that far below last May's record high of a 4.28 million rate. For all of 1996, sales totaled 4.09 million, the best in 18 years.”

December 4, 1997 - Rocky Mountain News
WASHINGTON – “U.S. sales of new single-family homes unexpectedly fell in October, the second decline in three months and a sign a big contributor to U.S. growth may have settled on a high plateau as 1997 draws to a close. Sales dropped 1.7 percent to a seasonally adjusted annual rate of 797,000 in October, with every region reporting a decline except the South, Commerce Department figures showed. In September, sales advanced a revised 2.5 percent to an 811,000 annual rate after falling 2.6 percent in August. Previously, the government said sales of new homes fell 0.2 percent in September.”

So What Is History Telling Us?
Well, it is un-nerving and can drag out for a while but things do settle out. So be patient and do take a long-term view. However, there are people then and now who would be shortsighted to proclaim the following:

“If you're a homeowner, I hope you love your house. For another 20 years or more, your property will shower you with psychic rewards but probably not a lot of financial rewards. As baby boomers plan for the future, they'll have to take a hardheaded view of how much home equity they'll have and when they might want to sell the house that they occupied during their working years.

To investors who follow the stock market, pessimism makes no sense. Stock prices always bounce back after slumps and go on to new highs (at least they have in modern times).

But real estate doesn't work that way, partly because it's tied to demographic change. Take the boomers, for example. The same people who once helped drive house prices up are now the wet blanket holding them down. They own a huge inventory of homes. These houses will come on the market over the next 20 years, and there aren't a lot of people to buy at the high prices boomers think they deserve.”
You think that the above article was written recently? Judge for yourself, for here is the link to the original Washington Post article.

It all goes to show that no one has a clear crystal ball so do have hope.

May Your Trading Be Profitable!
Ed Kim

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