Real Estate's Role Reversal In 2006
Monday, January 01, 2007SUSIE GHARIB: Turning to the economy, perhaps the most significant development of 2006 was the slowdown in residential real estate after several years of strong demand. As Stephanie Dhue reports, the turnaround from a sellers' market to a buyers' market happened fairly quickly.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the opening months of 2006, the housing market showed surprising strength. Housing starts hit a 33-year high in January, as sales of both new and existing homes continued to hold firm. Economist Richard Brown watches the housing market for the FDIC.
RICHARD BROWN, CHIEF ECONOMIST, FDIC: The year began with really the culmination of the great housing boom of the first half of this decade.
DHUE: But by the second half of the year, it was clear that the market had peaked and that sales had gone into a tailspin. Realtors economist David Lereah says the decline was sparked by speculators leaving the market.
DAVID LEREAH, CHIEF ECONOMIST, NATIONAL ASSOCIATION OF REALTORS: Investors and all the speculative lending and investing that was happening in the marketplace took the punch bowl out of the boom party.
DHUE: Mortgage Bankers economist Doug Duncan says at that point, buyers generally began to rethink their purchases.
DOUG DUNCAN, CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION: Consumers just sort of stopped buying. They took a deep breath and demand slowed way down, revealing a significant supply of properties.
DHUE: To entice buyers, home sellers jumped in with incentives. Builders offered to finish extra rooms. Condo sellers assumed annual maintenance fees and some homeowners even tossed in a new car. But these incentives masked what was really happening to home prices.
RICHARD GREEN, REAL ESTATE PROFESSOR, GEORGE WASHINGTON UNIVERSITY: If you sell a house for $950,000 and throw in a Mercedes, you're really selling it for $900,000, but it will show up as a $950,000 transaction.
DHUE: Actual home price declines began showing up in the statistics in August. That's when the National Association of Realtors price survey showed the median existing home price falling 1.7 percent from year-earlier levels. Deflating home prices quickly caught the attention of lawmakers on Capitol Hill. Senator Jim Bunning put the blame on loose lending standards and speculative investing, which he said may have driven the market to an inevitable decline.
SEN. JIM BUNNING (R) KENTUCKY: If the market has moved because of unsustainable or artificial forces, we may be in for a rough ride.
DHUE: The ride is already rough for borrowers with poor credit. At year's end, 13 percent of sub-prime loans are delinquent and 4 percent are in foreclosure. Many economists predict the market will begin to recover in the second half of 2007, but if history is any guide it may take longer.
BROWN: The periods of price stagnation that have tended to follow the booms in the past also last for multiple years, so some of those boom markets may not see significant price gains for the remainder of this decade.
DHUE: Overall, 2006 was the third best year on record for housing sales. But it's likely to be better remembered as the year that ended the five-year long housing boom. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
