As we move into 2006, we’ll see prices continue to rise, but at a much slower pace. David Seiders, chief economist for the National Association of Homebuilders is calling for nationwide price appreciation of about 6%, or half the 12% we saw throughout 2005, and sees sales falling by 6% to 8% in 2006.
Builders are responding to the news by cutting back on new home starts in order to build tightly to demand. Starts fell by about 12% in December. Still, the homebuilding industry has momentum because of the necessity for long term planning, and builders in the Midwest and South are cutting prices and offering incentives in order to liquidate growing inventories of unsold homes.
All this means a return to a more normal market climate, and is not a harbinger of the kind of price crash we saw in some markets fifteen years ago. Back then, homebuilders were building on “spec” and got caught with huge unsold inventories when the market cycled over the top. Now, the wheeler-dealers have been replaced with MBA’s using sophisticated econometric models to forecast demand.
This is not to say that the price boom and buying frenzy of recent years wasn’t driven by speculation. It was, but the speculators were the buyers, not the builders. In hot markets such as Phoenix AZ, Las Vegas NV and Naples FL, more than 25% of buyers in 2004 and 2005 were out of state investors who had no intention of ever occupying the homes they were buying.
Now, as these investors are being washed out of the market, we’re seeing the beginning of price corrections in the bi-coastal overheated markets. Over the last 90 days, prices have dropped 4.5% in Boston, 5.4% in Washington DC, 3.5% in San Francisco, and 4.8% in Los Angeles.
What’s even more significant here is that in Los Angeles and Boston, for example, prices have been flat for the last 30 days. Is the correction over? Probably not, but there is also no bursting bubble. This is more like a slowly deflating souffle.
Foreclosures creeping up
As markets slow down, we’re seeing an increase in foreclosure activity in the manufacturing dependent Midwest, in California and in the Northeast. Seiders pointed to Michigan as experiencing “elevated levels of default and foreclosure” reflecting the woes of automakers and resulting job loss over the last five years.
California foreclosures began moving up in the 4th quarter of 2005 after bottoming out at historic baselines the previous summer. In Massachusetts, foreclosures jumped 35% year over year in 2005.
Investors:Â Weed your leads with care
As sales slow and prices soften with rising interest rates and increasing time on market, investors will need to become choosier about which leads to pursue, and plan on buying at deeper discounts. Remember that profits are made when you buy the property. Also plan on longer hold times as you compete with growing inventories of unsold homes.
We said it before, and we’ll say it again: Don’t speculate–calculate! Buy right and you can make profits no matter what the market is doing.
