Monday, January 08, 2007

Prices are Sticky on the Way Down

No Data Analysis today, although I am working on a couple of interesting things which I hope to post this week.

I thought this article was interesting from the Boston Herald featuring an interview with Karl Case. He is a founding partner in the real estate research firm of Fiserv Case Shiller Weiss, Inc. (Note: He is a colleague of Robert Shiller, whose name is more recognizable) He is a Director of the American Real Estate and Urban Economics Association and Associate Editor of the Journal of Economic Perspectives. Mr. Case knows a thing or two about the real estate market and its dynamics.

Here is the article:

Buyers vs. home sellers: Standoff could lead to recession
By Scott Van Voorhis Boston Herald Business Reporter
Friday, January 5, 2007 - Updated: 11:57 AM EST

How bad is the real estate market?
At a national conference today, Wellesley College housing guru Karl Case will release the results of a five-month groundbreaking survey of the housing market in Boston’s suburbs. And it’s not happy reading. After tracking 628 homes on the market from July through November, Case found that fewer than a third actually sold. It paints a picture of a market nearing a standstill, in which would-be sellers are opting to take their homes off the market rather than accept big markdowns. Over such a lengthy period, even in a slow market, one could expect 70 percent of these homes to have sold, Case estimates.

But Case’s study found only 30 percent moved. The Massachusetts Association of Realtors has put the average time on the market at four months now. The pain appears to be spread pretty evenly, from the Merrimack Valley town of Andover, which saw just nine of 30 homes sold or put under agreement, to Weymouth on the South Shore, which saw just seven sales of the 30 homes tracked by the study.

Despite the big drop in sales activity, there was no price implosion. Instead, average selling prices fell just 6.3 percent. After seeing the value of their homes soar during days of the real estate bubble, home owners are reluctant to give ground on price. Or, as Case puts it, it’s a case of “sticky” prices common to past market downturns. That could help minimize the feared drop in the “wealth affect,” where a decline in home values puts a big dent in consumer spending. But the standoff between would-be home sellers holding out for top dollar and buyers seeking a bargain is far from ideal. Instead, the drop in home sales activity could be a more serious economic threat, Case believes. Combined with an already-large drop in housing starts, it could put a measurable dent in the nation’s economy. The housing cool down, in turn, could lead to the loss of 1.4 million jobs by the end of 2008, pushing up the national unemployment rate to 5.8 percent, Case’s report estimates. All of which is in marked contrast to the predictions of real estate industry organizations, which have been forecasting a big market rebound in the spring.

Still, the Wellesley College professor and nationally respected housing expert was shying away from grand predictions on where home sales and prices are headed over the next few months. Instead, he is letting his research do the talking. Such as this selling fact: real estate downturns have contributed to three prior recessions. That about says it all
Dr. Case's analysis would seem to indicate that we shouldn't expect drastic price changes from month to month or even year to year but rather a long and drawn out decline in sell/list ratio and prices.


ADWeaver said...

Any idea if this was the case with prices in 82 and 95, or did things play out quickly?

I've heard/read that there have been significant price declines in some states, I wonder if this could be indicative of a lower proportion of investment properties being held from one state to another.

Could be interesting (maybe more so in 6 to 8 months) to look for a correllation between price declines and the how red or blue (politically) certain states are.

Something to this effect, but in realtion to RE prices.


Uncertain Buyer said...

This will be the case untill someone has to sell. Then they will drop to do so. Certain households have Mortgages that are due to reset to higher rates, which could leave them unable to pay.

Neighbourhoods with better financial strength will be slower to decline than those with more homeowners that took out risky mortgages....ARMS.

Seems like speculative areas like Florida are really taking a hit. Probably due to investors who leverage everything expecting to Flip for a profit.