An odd adjustment – housing market shaky despite good economy, mortgage rates

City Homes

Don DeBatBenchmark 30-year fixed-rate mortgages are holding steady near the 6 percent mark this spring, but the housing market is still shaky, leaving even some veteran analysts scratching their heads.

“Looking into 2007, we view this housing cycle adjustment as significantly different than the past two housing cycle adjustments – one from the late 1970s to the early 1980s, another from the late 1980s to the early 1990s,” said marketing expert Ron Peltier, president and CEO of HomeServices of America, Inc., a Berkshire Hathaway affiliate. Mortgage rates averaged 15 percent during that first adjustment period and 10 percent during the second.

“Past real estate slowdowns were economically driven,” Peltier said. “The nation was in or near recession, and the housing market was impacted by the nation’s overall economic climate.”

Peltier noted that past housing cycle adjustments occurred during periods of heavy job loss and double-digit mortgage rates. Ironically, the current housing cycle adjustment is taking place while the job market is still strong, mortgage rates are near all-time lows and the economy is healthy, he observed.

Investor flight

“Affordability and investor flight are at the core of the current housing cycle adjustment,” said Peltier, noting that investors and speculators have played an unprecedented role this time around.

“We believe that on a national basis some 25 percent of the transactions annually over each of the past three to five years were speculator-driven, even higher in some key coastal markets, with another 12 percent to 15 percent being second-home buyers, an ever growing market segment,” Peltier said.

“We’ve never had this volume of speculators, and we’ve never had this volume of second-home buyers – a phenomenon driven by the rapid increase in condominium construction and vacation properties in many select markets,” he said.

As investors began “flipping” these properties, the nation’s housing inventory grew, Peltier observed, but rapid residential real estate appreciation left many primary buyers priced out and sitting on the sidelines.

Balance returning?

With home prices softening to appropriate levels this spring, Peltier sees buyers re-entering a “more balanced” marketplace. “We believe that by the end of 2007 we will see a return to near normal inventory levels, although it may take into the second quarter of 2008 for the market to fully correct in the most overheated areas.”

As a result of the market correction, Peltier advised buyers and sellers to “adjust their perspectives.” Homeowners looking to pocket appreciation similar to the previous few years are going to be disappointed, and buyers looking to purchase at discounts of 20 percent to 25 percent will also need to have more realistic expectations, he said.

Rates steady

In a piece of good news for real estate this spring, the Federal Reserve Board decided to leave the target federal-funds rate unchanged at 5.25 percent during a recent policy-making meeting. Rates have held at that level since June of 2006.

As a result, Freddie Mac reported that benchmark 30-year fixed home-loan rates were hovering around 6.17 percent in late April. Mortgage rates generally have been declining or stable for the past eight months, experts say.

In early November of 2006, lenders were charging an average of 6.33 percent for a 30-year loan. And back in mid-July of 2006, the average rate was a lofty 6.74 percent. Last year at this time, 30-year fixed loans averaged 6.32 percent.

Beginning in mid-2004, the Fed methodically raised short-term interest rates 17 times over a period of two years. The series of quarter-point interest rate hikes were designed to make sure inflationary pressures remained under control.

With the recent declines, a 6 percent home loan rate is less than 1 percentage point above the 40-year historical rock bottom of the market – 5.21 percent in June of 2003, experts say.

However, the world of mortgage-land is unpredictable and volatile. Few of today’s novice borrowers remember that only 7.5 years ago, in August of 1999, lenders were quoting 8.15 percent on 30-year fixed-rate mortgages.

Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is chief executive officer of DeBat Media, Inc.

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