Jon Lansner of the Orange County Register interviewed USC real estate finance professor Tracey Seslen on where we are in the housing cycle.
Us: So how does this up/down cycle compare, nationally and locally, to previous real estate cycles?
Tracey: In the past, housing downturns have often accompanied a more general recessionary environment. In this particular instance, the housing downturn can be pinned to very specific events, and may be a major cause of recession, rather than the other way around.
Thank goodness their wasn’t a recession in 2006! Can you imagine what would have happened to Arizona real estate prices if the economy tanked in 2006?
Us: Any guess to when we might hit a bottom, nationally or locally?
Tracey: My guess is similar to others’ — mid-2009, or possibly earlier.
Okay, I was guessing, as were many, that late 2008 or early 2009 would be the bottom for metro Phoenix as a whole. Maybe late 2008 to mid-2009 would be a better guess.
I think that the change in the conforming loan limits could be the most influential aspect of the Bush stimulus package on account of the fact that it actually provides real (as in non-illusory) liquidity to families in places that need it most — traditional high-home-price states of California, New York, and other parts of the east coast.
It’s nice to hear some positive news!
Us: How do real estate cycles compare to other assets? There’s been talk that home prices are often “sticky” on the way down, but you couldn’t tell that this time!
Tracey: … One of the reasons we’ve seen transaction volumes hit record lows isn’t just because people don’t want to buy or can’t get the loan they need – it’s because sellers aren’t willing to sell their properties for what buyers are willing or able to pay.
Interesting point.
I think sellers are usually wrong when they decide not to sell because they want to, “See if the market turns around next _____.”
Real estate price trends don’t usually change quickly. Home prices are a train that takes years to change direction. Think about the size of the run up in prices and then think about the number of years it may take to correct it.
If you are a home seller and you hear yourself saying, “I’m just going to wait out the market” then you will probably end up selling for less money later. You are betting against the current tide.
Us: How do “external” factors, like credit crunches or Fed cuts, factor within real estate cycles?
Tracey: … Fed rate cuts will eventually filter down to Treasury rates and other rates to which loans are indexed, and potentially provide cheaper safe (i.e. 30-year fixed) loans to those looking to buy now. The higher conforming loan limits will make for cheaper borrowing as well. If the cost of funds decreases, more people on the fence about purchasing will take the plunge and get into the market for a home sooner.
2 responses so far ↓
1 Brian McMorris // Mar 9, 2008 at 8:52 pm
There is a lot of talk right now about how the bump to $750K in conforming loan limits are really going to free up the real estate market on the Coasts. But this presumes that the agencies which require “conforming loans” will be in a position to make those loans.
Right now, both Freddie Mac and Fannie Mae (Government Sponsored Entities or GSEs)a are in a world of hurt. There is a real question if they will even remain as going publically traded concerns. Given their precarious balance sheets (see Barrons cover story from this week) it is possible both agencies will be technically bankrupted (investors wiped out) which will require the government to take them over and “governmentize” those agencies once again, as they were last in the 60s.
If it does happen, this process of GSE bankruptcy may take several months to more than a year to play out. During that time, those agencies will be hard pressed to take more debt on to broken balance sheets. Since the GSEs have recently been underwriting more than 50% of the country’s mortgages, what will happen to the housing market with both those agencies locked up?
For this reason, I question the premise of a residential real estate turnaround of any significance by mid 2009. It may bottom by then, but will bump along that bottom for some time (five years or more?) until 1. buyers “at the margin” are again willing and able to obtain/ qualify for mortgages and 2. Fannie and Freddie are again able to originate / underwrite mortgages in a significant way.
Real estate has historically had a very long cycle. As John points out: “Home prices are a train that takes years to change direction”. That cycle may be 30 years from top to bottom and back. Sellers should take this reality into account as John recommends.
2 John Wake - Real Estate // Mar 9, 2008 at 11:11 pm
Brian,
“… I question the premise of a residential real estate turnaround of any significance by mid 2009. It may bottom by then…”
To be fair, you two probably agree. The question was, “Any guess to when we might hit a bottom.”
The unspoken part was, “… and then drift sideways for a few years.”
There can also be confusion between sales and prices. For example, the number of home sales might bottom out this year (earlier I was thinking 2007) while median home prices might bottom out in 2009.
I expect a quick and full bailout of Freddie and Fannie, if needed in this election year. The government moved very quickly on the changes in the conforming amounts.
If indeed, they went bankrupt, it would be total nuclear destruction for the U.S. housing industry, but I don’t expect that.
They’ll end up getting a blank check from the U.S. Treasury if needed.
Leave a Comment