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September 30, 2005

Homebuying plans plunge, are housing prices next?

UmichsurveyStunning new finding today.  According to the University of Michigan's monthly Survey of Consumers, consumer confidence dropped to it's lowest point in 12 years, pulling homebuying plans to their lowest point in a decade.  According to Inman News, "The decline in home-buying plans was due to an increasingly negative reaction to high home prices, as consumers expressed in September the least favorable assessment in nearly a quarter century." 

How did the housing market go from record high real estate searches on Boston.com in March of 2005 -- seven million page views generated by one million homes for sale searches -- to no-shows at suburban open houses, and now this news? 

Have inflated housing prices reached a historic turning point that will see prices decline for years or is this just the annual October scare made worse by gas prices doubling in the aftershock of Katrina? Consumer confidence slipped to a nine year low on Halloween 2002 just before the housing market entered into the second wave of the current price surge.  So, no big surprise that the relentless press coverage of the real estate bubble has pushed homebuying plans down again this time of year, right?

If, on the other hand, you believe that prices in 2003 to 2005 were bloated by opportunistic buying driven by fears of rising interest rates, investors, and interest-only loans, you may be patting yourself on the back for not buying this Spring at the top of the market and wondering how far prices will fall as interest rates rise.

Should you sit out the Fall market, or take advantage of the "let's make a deal" price slashing that begins this time of year while interest rates are still near forty year lows?  We'd like to hear your opinion.  Click on "Comments" below or call 617-876-2117 to record a one to three minute sound bite that we may use in a future podcast.

Bill Wendel | 07:51 PM in Market trends, Real Estate Bubble | Permalink


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I would prefer to buy in a higher interest rate situation than a lower interest rate situation as the risk of higher interest in a high interest rate situation is lower than the vice-versa. One never knows when a need would arise to sell.
As per the monthly payments for a particular home, they will adjust itself as per the basic principles of Economics (wages and job growth).
Till then I would rent, relax and wait for the correction.

Posted by: Venkat | Oct 3, 2005 2:17:05 PM

25% adjustment to real estate and stable for next 5 years...

this is just my thinking for next 5 years, after that...i look forward to asia economy

Posted by: jason | Oct 3, 2005 4:49:08 PM

No way I am buying on this kind of market. I rather get into a high interest loan with a low pincipal than viceversa.
The logic is very simple, for a smaller loan I can make a larger down payment and also any extra payments I send make a bigger difference on the principal.
On low interest high principal loans, the debt is more difficult to pay and the possibilities of refinancing are lower, after all if you have a low rate, it would be difficult to get one considerably lower.
I am just sitting for a couple of years a see if the market is in a better position.

Posted by: Virgilio Arciniegas | Oct 4, 2005 1:33:01 AM

Agree, agree, agree. So now the question is... what to do with the money that I've labeled as "down payment" money? When I thought I was going to buy (in 2004) I took this money out of the market (index fund) and put it in my ING Orange (so that I wouldn't risk short term market fluctuation.)

That money is still sitting in ING -- which is OK, but it's not where I'd put it if I *knew* I wasn't going to be buying for, say, 3 years.

If the hope is for the high-interest rate loan (in a few years) with corresponding lower prices, where to put your cash in the meantime to bulk up that down payment?

While I am short on KBH, TOL, DSL, FNM, LEN, and LEND (so far so good!) I'm not risking very much with that mishagas.

Comments and thoughts are welcome.

Posted by: John Greene | Oct 4, 2005 2:48:11 PM

well all i can say is i am very glad that for once in my life i made a right move when it came to investing. just sold my six ubit in the providence market in july and the market has died.made it by two months, and in real estate that is like, two minutes. for all those people who want to know the future,there is a cristle ball.it is called the market in england,watch that market in england and you will see the u.s in 6 months to a year.currently the english retail economy is off by as much as fifty percent in some area's. this is huge because there economy is so much like ours. as an economics person, i believe that the u.s economy will stagnate for as much as ten years unfortunately. good luck and by all means don't buy a house.

Posted by: laughing | Oct 4, 2005 6:36:26 PM

I know a lot of people who have pulled the plug on house-hunting, finally waking up to the fact that the market has peaked and is in dangerous territory.

It's now a game of wait-and-see. If over the next year or so the economy does not demonstrate signs of resilience, or if interest rates don't start to plateau, buyers are all going to sit out and watch it collapse. If the country falls into a full recession as many predict in '06, especially a "stagflation" scenario, real estate could plausibly fall 50% from its highs before it bottoms out. That is not a gloom and doom scenario -- it would only mean giving back 4 or 5 years of growth in many markets, and many observers are predicting worse.

Even if the economy firms up unexpectedly, and/or the fed backs off the tightening, real estate will struggle for a few years at least, bleeding a few percentage points a year. No matter how you look at it, buying at today's prices would be a fiscally foolish move.

Posted by: LowTenant | Oct 5, 2005 9:59:00 AM

The fed,A. Greenspan, fannie/gin mae have been prolonging the real estate boom thur easy credit policies in order to keep the economy afloat thur inflated real estate prices. This is what the Gov't did before the stock market collapse in 1929, injecting low credit rates to provide repeated stimulus to the economy, stoking the boiler if you will. There wil be a slide in 2006?2007 how hard is big question?

Posted by: peter m | Oct 8, 2005 3:16:30 PM


Thanks for putting the current popularity of easy credit loans into historical perspective. A leading Seattle-based real estate blog, RainCityGuide.com, posted this observation earlier this year:

"Jack Guttentag (a professor at Wharton) had a much more skeptical (and I think more interesting) article on interest-only loans that dived a little deeper into the history of these types of loans. He describes how interest-only loans were all the rage in the 1920s…

"However, the drop in real estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since."

"Mr. Guttentag concludes that interest-only loans are “gimmickry, misdirection, and misperception” and that “if you don’t need an interest-only mortgage to qualify for the house you want to buy, it is not the best choice.”


Posted by: RealEstateCafe | Oct 8, 2005 3:39:11 PM

With my husband, we decided not to buy after looking for a house in Manhattan. Instead we rent, keep on saving and invest that wisely (in your own business for example). It will surely provide a better return than real estate.

The rule of thumb is to buy a house which price is between 2.5 and 3 times your annual income. In Manhattan, the median household income is around $50k. That means that the median household should go for a house that cost up to $150k. But nothing is offered by less than 300k! Median sale price at 2Q 2005: 775k.

Granted, in Manhattan 30% of the households don't earn more than 25k per year, they would not be able to afford a house even in the worst crash. But 45% earns between 25k and 100k, they are priced out. So literally 3 in 4 households should not buy now at the actual prices. So an adjustment of 50% during the next couple of years should not be a surprise.

I agree with John Greene, look at UK. That Manhattan is different? high prices are justified here? all that's been said about Manhattan can be said about London too, and prices are falling there.

Posted by: Julia | Oct 11, 2005 3:49:47 PM

I'm in the process of developing a property in the UK to sell up and move to Florida. International buyers like me are strongly influenced by the internet, it's my 'ear to the ground' away from the optimism of international realtors. What I'm hearing from the web is don't buy, rent and see. A lot of property is still going up in Florida - so with this general concensus in opinion, the market simply has to fall in 2006. Positive perception that fuelled the last few years seems to have dried up.

Posted by: Chris | Nov 4, 2005 1:37:09 PM


Thanks for your perspective from overseas. I attended the National Association of Realtors convention last week, and their chief economist entitled his talk something like, "A Slowdown to an Expansion." He agrees there is a short-term slowdown, but says long-term population increasings in Florida will be more important. I havent' followed that market closely, but a year ago at the same convention a leading listing agent told that the market was being driven by foreign investment, and could not be sustained by internal growth. If you and others overseas are taking a wait and see attitude, and local residents are doing the same, sounds like two strong downward pulls on the market and the possibility of foreclosures. That was the subject of one of my recent posts based on foreclosure stats coming out of the UK. Is your situation really as bad as this story makes it seem; and if so, how long would you guess it is before we seen the same kind of stats in the US?


Posted by: RealEstateCafe | Nov 4, 2005 2:07:37 PM

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