An in-depth look at our market

By Melissa Wirkus

The slowing market is turning out to be worse then initially expected. It seems as if the whole economy, not just the real estate world in general, will be affected by the cooling market.

The interesting thing with this topic is that we knew it was going to come sooner or later. The real estate world enjoyed five years of booming success, and what comes up must come down, and so goes the market.

In his September 12, 2006 article from The New York Sun, “Real estate recession coming,” Robert Aliber looks at the various aspects of our cooling housing market. Aliber gives a harsh look at the fate of our market, and it is not something that anybody wants to hear.

“This decline is just beginning and will become more severe because of a recession that will be triggered by the falling home prices. This in turn will lead to a surge in unemployment and many of the newly-unemployed will no longer be able to afford their homes.”

Now although this seems like a death sentence for our economy and the health of our nation in general, it is just a forecast, and it may not necessarily come true. Nobody can predict exactly what is going to happen to the market and our economy, we can only make predictions.

Home prices appreciated at record levels during the boom, and now they are starting to fall, causing a lot of problems.
“The first factor that led to the unprecedented surge in home prices of more than 50% in the last five years is that the Federal Reserve began to pursue an extremely easy money policy in 2001 to buffer the economy from the implosion of the stock price bubble of the late 1990s.”

“Nominal interest rates declined to 1%, and since the inflation rate bounced around 2%, real interest rates were negative. The combination of low interest rates and the ready availability of credit led to a surge in home prices that in turn led to exceptionally high levels of both new construction and remodeling — new kitchens and bathrooms. Moreover the surge in household net worth that followed from the much higher level of home prices facilitated borrowing. People used their new collateral to pay for autos, vacations, tuition, and even daily living expenses.”

Lenders also contributed to the problems because they came up with alternative loans and ways of issuing people into homes they really couldn’t afford, now people are stretched beyond their means and having trouble making monthly payments.

As for people who want to sell their home right now, they are running into more trouble than ever before. Some have even resorted to auctioning off their homes because of the lack of buyers.

“The supply of homes nationwide for sale is much higher than at any time since the early 1990s, about equal to six months' sales. In part the increase in the inventory of unsold homes reflects a stalemate — buyers are waiting for prices to decline further while sellers are reluctant to reduce their asking prices in anticipation that there is an eager buyer just over the horizon.”

As mentioned before, the slowing market is affecting just about every sector of our economy, even the stock market and consumer spending.

“Financial markets have already responded. Share prices of companies that are major home builders have declined by 30-50% in the last year. The decline in spending that will follow from the combination of the sharp decline in new home construction and the much smaller borrowing against lower home values will lead to a sharp increase in the unemployment rate. Foreclosures and price drops will follow.”

All of this sounds like doom-day news, but it may not be as bad as forecasted. Hopefully we will come out of this slump with increased knowledge of our market and economy, with little skin of our backs.

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