TOPICS > Economy

Housing Market Update

November 29, 2005 at 12:00 AM EDT


GWEN IFILL: For months, economists and homeowners have been on the hunt for any sign that the nation’s robust housing boom may be going bust. This has week has brought mixed news.

The Commerce Department reported today sales of new homes rose a record 13 percent in October, but yesterday, the National Association of Realtors reported sales of previously owned homes fell by nearly 3 percent in the same period. What to make of all of this? For help, we turn to David Lereah, the chief economist for the National Association of Realtors.

We heard bad news this week. Let’s run through that. We heard that luxury home forecasts are down. We heard that existing home sales have dropped off. We heard that the inventory of unsold homes has increased. And then we hear this news today. What are we to make of that?

DAVID LEREAH: Well, first, most of the news has been softening in the housing sector. It’s beginning to slow down. The boom is — has peaked and we’re starting to see some slowing. The news we heard today were new home sales. They were contracts. It was based on a very small sample that the government conducts. And it’s subject to very, very large revisions.

So any economist will tell you that the new home sales release is probably going to be revised downward next month. So I wouldn’t put too much stock into that number right now.

GWEN IFILL: Why do we measure new home sales differently from existing home sales?

DAVID LEREAH: New home sales are contracts and existing home sales are the actual closings when you actually sign the papers and move into the house. We do have pending home sales on existing homes which are contracts. It may sound complicated but next week we will come out with those numbers. Those numbers, I suspect, are not going to be great numbers.

They’re not going to be 13 percent soaring activity like new homes so I suspect the new home sales numbers will come down. I don’t think it’s reasonable right now.

GWEN IFILL: Was there ever such a thing as a housing bubble?

DAVID LEREAH: I don’t like to use the word "bubble" because bubbles burst.

GWEN IFILL: Exactly.

DAVID LEREAH: Balloons don’t burst. You can put air in a balloon and it can expand or you can deflate a balloon, where air comes out. So if you’re looking at different metro markets around this country that got real hot over the last four years, I like to use the imagery of balloons because they’re getting hot. You’re putting more air into those balloons. The prices are going up. But now air can come out of the balloon rather than the balloon popping.

GWEN IFILL: So we’re hearing a hissing sound rather than a pop.

DAVID LEREAH: I think that’s probably the best analogy to use right now.

GWEN IFILL: So let’s talk about the home inventory for a minute. Everyone has anecdotal stories about seeing "for sale" signs which seem to stay on the market longer. What does that tell us?

DAVID LEREAH: Well, I can tell you that I have been waiting for inventories to go up for the last two years. Inventories are the big problem in the housing market. It’s been too lean. You can go to places like Anaheim, California, where they measure inventory not by months but by days.

You put a house on the market for one day, you have fourteen people lining up to purchase it. That’s not a healthy marketplace. So we want inventories to rise a bit so that demand and supply can get into better balance with one another. That’s what’s happening right now.

GWEN IFILL: Are people tracking home prices, or are they tracking interest rates? Which of these things is driving what seems to be at least a flattening of the market?

DAVID LEREAH: Well, I think it’s not tracking. People that want to purchase a home are now faced with higher mortgage rates. So the cost of purchasing that home has just gone up on them. The monthly payment is now higher. That’s going to deter some of those households from purchasing. That’s why we’re seeing some slowing.

But what’s really happening is that some of these seller markets — because we’ve had these big seller markets for a long time now in this boom — they’re transitioning to a buyers’ market. That’s what’s really happening in some of these hot marketplaces.

GWEN IFILL: Which is part of the design of the Fed I assume in raising interest rates over time?

DAVID LEREAH: Well, the Fed, I think if I were the Fed, I would want to orchestrate air coming out of some of these balloons rather than hearing the popping noise. And so far the Fed has been on target. They’re raising rates. Mortgage rates are rising modestly. And that’s what’s helping the housing market. You’re not getting sharp rises in rates, just modest rises.

GWEN IFILL: Is there a trickledown effect to the economy or is the economy driving the housing market?

DAVID LEREAH: The housing market drives the economy right now, and it has for the last four years in a big way. Certainly housing — and this has been written about a lot over the last several months — if the housing market slows, it’s going to slow the economy. That is true. There’s been a wealth effect in the housing market for the last four years.

We’ve built up and created about $4 trillion of wealth. People spend from that wealth; even though they may not sell their homes, they feel richer. They feel wealthier. They’re spending money in the economy. They also take out equity lines and spend money in the economy. A lot of that will start to slow down; as the housing market slows down, that will have some negative impact on economic activity.

GWEN IFILL: Another effect of wealth has been what people will spend it on. There’s been all this speculating going on in the real estate market: Flipping — condos in Florida, for instance, people buying them at pre-construction prices and then selling them the minute they’re done. Is that over?

DAVID LEREAH: Well that’s the best point you’ve made so far because that’s the biggest risk in the housing markets today, and that’s the speculative piece. That’s highly concentrated in a few markets. That’s not all over the country. It’s highly concentrated in places like Miami, San Diego; even Washington has some of speculation as well.

The risk of speculation right now is that if interest rates continue to go up, those speculators will sell all at once. If they start all selling, putting their houses and their investments on the market —

GWEN IFILL: There’s a glut.

DAVID LEREAH: There could be a glut and prices could soften considerably. That will only happen in certain local areas of the country because that’s where the speculation is taking place. So I would not generalize to the whole country because that’s not the case.

GWEN IFILL: If you’re an average home buyer for whom owning a home is your major investment you’ll make in your own life, you look at these numbers and you’re trying to decide should I be selling now, should I be buying now or should I just stay out of it, what?

DAVID LEREAH: Well, if I’m not a homeowner and I’m thinking of purchasing a home, I would always purchase the home. Be a real estate owner; own property and you’ll benefit from equity gains and wealth gains over the years. Have a long-term horizon.

If I’m looking to sell right now, you know, it’s still a seller’s market but it’s starting to transition to a buyer’s market so it’s a good time to sell if you want to right now.

If I’m a buyer I’m still looking at historically low mortgage rates; even though mortgage rates have risen somewhat, they’re still hovering around 6.25 percent. That’s historically low. That’s low-cost financing. I would take advantage of that.

GWEN IFILL: Is there an incentive to stay and see what happens next, stay put and see what happens next?

DAVID LEREAH: There’s always some fence sitters. If you sit on the fence and do nothing, that’s a gamble in itself because if you do nothing and rates continue to go up, you lost because now you’re going to have higher monthly payment s with the next loan.

GWEN IFILL: Such challenges for people out there in the market. Thank you very much for helping us with us, David Lereah.

DAVID LEREAH: Well, thank you very much.