All Crashes Should Be So Good

National housing sales numbers are merely receding to 2003 levels, “and that was a record year,” says Doug Duncan, chief economist of the Mortgage Bankers Association. Serious sellers and buyers shouldn’t be misled by predictions of imminent crashes, he says, because the reports of doom ignore the positives in the current marketplace, particularly mortgage rates. “The rhetoric is just way overwrought,” he says. Donald Kohn, the Federal Reserve’s vice chairman, views the housing slowdown as a “correction” — a cyclical rebalancing of a marketplace that got too hot for too long in some parts of the country, and is now heading back toward more “normal” conditions, where prices are more in line with what consumers can afford. “The reported declines in house prices in a number of areas should help to facilitate the rebalancing of supply and demand in those markets,” Kohn said. In contrast to past housing downturns, he also noted that today’s “unusually low” long-term mortgage rate environment “stands in sharp contrast to some past downturns in the housing market that followed actions by the Federal Reserve to tighten credit conditions significantly.” Lower asking and selling prices on houses could help shorten the correction process, increasing the number of potential buyers, especially if mortgage rates dip below 6% in the coming months, which some Wall Street capital market analysts expect. (www.washigntonpost.com)
Washington Post (10/11/06); Kenneth R. Harney

[Return to top]

Moskow Joins Chorus of Fed Officials Shying From Lower Rates

The fifth Fed official since Oct. 4 to play down a possible cut in interest rates, Federal Reserve Bank of Chicago President Michael Moskow said that central bankers may need more rate increases to curb inflation. “Some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability in a reasonable period of time,” he said last week. At their meeting on Sept. 20, policy makers on the Federal Open Market Committee (on which Moskow is not a voting member) saw a “substantial risk” that inflation may not recede as expected. “My current assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low,” Moskow said, although he did acknowledge that weakness in the housing sector is “the most notable” factor restraining economic activity and “there is uncertainty about how important this factor will be for overall growth.” David Seiders, chief economist of NAHB, said he expects the U.S. housing market to slide for the rest of the year, subtracting about one percentage point from second-half economic growth. (www.bloomberg.com)
Bloomberg News (10/13/06)

[Return to top]

It’s Been a Bumper Crop of Bad News for Salinas

The agricultural city of Salinas, Calif., the largest in Monterey County, is still reeling over last month’s spinach scare, with a local grower last week voluntarily recalling 8,200 cartons of lettuce that may have been irrigated with water contaminated with E. coli, but housing affordability is a more stubborn problem. Only 3.5% of the city’s households can afford the area’s median-priced $610,000 home, according to a survey conducted by Wells Fargo Bank and NAHB, making Salinas the least affordable city with a population of less than 500,000 in the U.S. Real estate broker Rafael Ramos, who advertises in Spanish that he can “open the door to your dreams,” sells Salinas’ pricey homes primarily to a shrinking pool of agribusiness managers, corrections officials from nearby prisons and even workers from the Silicon Valley, which is more than an hour away. But about 30% of the homes he sells go to two or even three families cramming in together. “They just can’t make it here,” says Ramos, a native of Mexico who used to work in the lettuce fields and peddle CDs at flea markets. Tom Carvey, head of a pro-growth group called Common Ground, says that Salinas, whose 155,000 population is 70% Latino, has been hemmed in by county land-use policies advocated by the wealthier, predominantly white residents of the Monterey peninsula. (www.latimes.com)
Los Angeles Times (10/12/06); Steve Chawkins

[Return to top]

Nightmare on Wall Street

With Halloween approaching, financial experts have been looking for five factors that could frighten the markets even as the Dow hits all-time highs, and the housing market is one of them. An unexpectedly sharp slowdown could be a downside risk for the market, analysts say. “There is still likely more pain and suffering to come before we can close the books on this housing cycle,” said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a Sept. 21 report. “And the harder housing falls, the harder it will be for the economy to land softly.” Still, some see the weakness confined to housing, while other maintain the worst could be over. "Gains in nonresidential and public construction spending have offset the drop in residential construction,” according to Ed Yardeni, chief investment strategist at Oak Associates. “Will the housing market lead to an economy-wide recession?” he asks in an Oct. 10 note. “Not in our forecasts.” In another scary area, some investors are already looking forward to the possibility that the Fed will cut interest rates sometime next year to spur economic growth. The market will begin to price in this prospect during the fourth quarter, says Jeff Kleintop, chief investment strategist for PNC Advisors. However, there’s a risk that the Fed will not cut rates as soon as investors hope, other analysts say. No rate cut by early 2007 is a serious possibility, and it would hurt stocks and bonds, according to David Rosenberg, North American economist at Merrill Lynch. (www.businessweek.com)
BusinessWeek Online (10/12/06); Marc Hogan

[Return to top]

Analysis: The Region Can Relax About Housing ‘Bust’

After unprecedented growth from 2003 to 2005, the current real estate correction shouldn’t last too long in the Greater Washington region as jobs continue to grow and the local economy remains strong, according to Greg Leisch, CEO of Delta Associates, a real estate research firm based in Alexandria, Va. “Is there a housing bust? I think not,” Leisch says. “It’s a return to normal. We don’t have two key prerequisites for a bust — and that’s an overproduction of housing and a trauma to the economy.” Condo conversions have dropped off considerably and Delta Associates projects that condo sales will drop from 13,500 in 2005 to 8,000 to 8,500 this year. However, with some projects getting canceled or flipped to apartments, and with more than 4,000 condo units removed from the area’s three-year pipeline in the third quarter, the slower growth in supply should bring the condo market back to normal. In the meantime, apartment properties are enjoying a surge in popularity as buyers temporarily shy away from condos. At 491,000 units, the Washington apartment market is the third-largest in the nation, behind New York and Los Angeles, but even with all those units the local market had a miniscule 1.4% vacancy rate in the third quarter. Doug Firstenberg, a principal of Bethesda, Md.-based Stonebridge Associates, which has a pair of residential developments under construction in the District and is planning a 250-unit condo and retail complex in Bethesda, is counting on job growth. “Clearly, things have slowed a bit,” he said, “but the market will always correct itself. By some estimates, this area is going to generate at least 55,000 jobs a year for 2007 and 2008, and that’s a conservative estimate. If you look at it from that perspective, we’ll continue to have an influx of people who want to live here.” (www.washington.bizjournals.com)
Washington Business Journal (10/16/06); Joe Coombs

[Return to top]

Reports of Condo Market’s Demise Greatly Exaggerated

The average price per square foot of apartments in Manhattan set a record $1,028 in the third quarter and was 6% higher than a year ago, according to Gregory Heym, chief economist for Brown Harris Stevens. According to a report by Jonathan Miller of Miller Samuel, the average sales price of a Manhattan apartment fell to $1.29 million in the third quarter from a record high in the second quarter, but the average sales price was still 12.1% higher than a year ago. “The press has been looking for a story for some time to herald the demise of the residential real estate market, and, as the saying goes, those reports have been greatly exaggerated,” said Robert Ivanhoe, the chairman of the national real estate practice of Greenberg Traurig LP. Clearly, however, Manhattan’s condo boom of the past few years reached its peak about 12 months ago, has cooled and the bloom is off the rose. “New York City remains a very desirable place to live,” said William McCahill, a partner at Apollo Real Estate Advisors. “Once the market perceives that prices have hit the floor, demand will return, stronger than most expect. Right now the market sees a falling knife which no one wants to grasp because of fear of injury. Once the knife hits the floor, the fear will be gone.” (www.nysun.com)
New York Sun (10/12/06); Michael Stoler

[Return to top]