The U.S. Housing Market

Running Head : US Housing Market

US Housing Market

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I . Overview of the current US Housing Market (Introduction of what the is about

The US housing market has always been regarded as a barometer or primary indicator where the country 's economy is and where it is going Recently , it has been at the forefront of concern for both federal and state regulators because of the high incidence of foreclosures especially in the sub prime market (Guha , the slowing down of new housing

construction (Flood Guha , and the drop in home sales for the first quarter of 2007 (Flood Guha . All these coupled with the rising gas prices drastically affected consumer spending for the same period (Callan . All of these have put a damper on the US economy as a whole (Callan , and even NY traders have felt the repercussion of the slowdown on the US housing market (Mackenzie

II . Overview of economic concepts and factors affecting the housing market

(Scenarios of precious boom and bust how is it different from the current housing trend

What we now see seems a very mild repeat of what happened in the several periods of boom and bust before the latest one during the early1990s when the housing market bottomed up a few years after peaking . According to Ian Morris , After inflation , house price declines occured in 1975 , 1979-82 and 1989-94 (Swann , FT . However what makes other market analysts and speculators remain upbeat is the fact that the same equation wasn 't present then and now . Previously the 1990s boom and bust have different factors and investment environment from what we have currently . During the 1990s , there was a lot of uncertainty with the prospects of a third world war with Saddam 's invasion of Kuwait and US intervention in the Middle East Conflict Soon after though was a boom that saw housing prices rise and another bust after 1995 . This recent housing boom that started soon after recovery efforts of the post 9 /11 scenario in 2002 and peaked in 2005 (Clothier ) and started its decline in middle of 2006 . There is an ongoing debate among market analysts if it has bottomed out yet , and it will stabilize in the next few months or if the worst is yet to come Whatever the outcome , what is more significant to see right now is that despite the start of housing prices decline in some cities like Detroit Michigan and previously red hot markets like Sarasota , Florida , there are other cities whose housing prices are still on the rise , however small like Manhattan , New York , and Southern California cities (Anderson . Factors that lead to this variances in housing bust and continuing mild boom ' can be credited to the local economy of the cities and its surrounding areas (Anderson ) and some aggravating circumstances in some cities like Detroit Michigan . Detroit was hardest hit by the closure and job cuts of car manufacturers General Motors Corporation , Ford Motor Company and DaimlerChrysler AG 's Chrysler (Valcourt , 2007 ) who have their manufacturing plants in Detroit

What economic theories and concepts apply

Basic Supply and Demand

There is a fundamental economic formula that market analysts go by - that is the law of supply and demand . In the US housing market , there are a lot of variables to consider not only because of the size of the physical landscape but also because of the economic landscape of the four main regions - Northeast , Midwest , South and West . Moreover , even within the regional physical and economic landscape , state and county socio-economic and political dynamics play a big role in the health and causal national effects of these economies . Again , an example in this case is Detroit , Michigan . When the big three (3 ) car manufacturers cut jobs and slowed down production of its biggest plants in Detroit , and the entire manufacturing industry which for (4 ) generations propelled the economy of Detroit was almost at a standstill by 2004 (Freeman 2004 . These three car manufacturers , the steel industry and other manufacturing plants practically kept the economy of Detroit strong and vibrant during its growth years . Now , its decline has caused the collapse of Detroit . With most of it former workers moving out of state and the housing demand is almost non-existent prices have bottomed out at almost 500 (Freeman , 2004 . And still , nobody is buying . As plentiful as the supply is , if there are no takers , then there is no demand

Fast-forward 2007 : Home sales have slowed down

Home sales have declined the first months of this year compared to the last two years . To quote

Federal Reserve Chairman Ben S . Bernanke said , Today 's U .S . economic figures , including a 16 .6 percent decline in January (2007 ) new-home purchases , were in line with his estimates (Clothier , Bloomberg

Also

Americans bought far fewer newly built homes than expected last month in a worrying sign for the economy , government figures showed yesterday .Sales of new homes fell 3 .9 per cent to an annual rate of 848 ,000 in February , while purchases in January were also sharply lower than previously thought (Callan

The question is what does a slowdown in home buying mean in a bigger context

The picture is sharply defined by Chris Flood in his article entitled Growth Data to indicate slowdown trend or blip . And I quote

US GDP first-quarter data , due on Friday , are expected to show growth weakening from 2 .5 per cent (annualized ) in the fourth quarter to 1 .7 per cent , with the slowdown in the housing market dragging residential investment spending sharply lower . Business investment is also likely to fall for a second consecutive quarter following weakness in core durable goods s , down 1 .9 per cent year on year in February .US consumer confidence for April is expected to fall from 107 .2 to 105 .0 , partly as a result of higher petrol prices (Flood , 2007

The article says it all . One economic event factors in and rolls on to the next . The cycle is started and goes on until something triggers another boom . Meanwhile , the slowdown in the housing market should have been expected when the housing boom peaked in 2005 . It is but logical that anything that ahs peaked would come down and it 's only a matter of when and how much it would affect the US economy as a whole

For now , since demand is so low , and supply of new houses and inventories of recently available old ' houses are high or more than ample , it should be a buyer 's market . However , housing prices in some areas are stagnant and some areas are experiencing a very slow reduction in prices . This is because homeowners and investors who want to sell are stubbornly holding on to keep market prices at current rates Buyers who are not biting yet are cautious because of the media hype on the housing bust . If inventories of houses on the market remain high economic activity on the housing industry will slow down as well Clothier stated the facts in his article in the online financial news Bloomberg .com

New construction on single-family homes will fall to 1 .16 million this year , the lowest since 1997 , the National Association of Home Builders has said . That will rise in 2008 to 1 .23 million , the builders said (Clothier , 2007

With the slowdown in the housing industry , the GDP will substantially be affected as well . What could further aggravate the situation is the clampdown of the sub prime lending because of a surge in foreclosures on high risk mortgages . To quote Saskia Scholtes of the Financial Times

Delinquencies and foreclosures among high-risk borrowers increased at a dramatic rate .foreclosure rates were already 6 .09 per cent by December , while 5 .52 per cent of borrowers were late on their payments by more than 30 days .Lenders also began shutting their doors , sending shock waves through the high-risk mortgage markets (Scholtes

As a result of the clampdown on the subprime mortgage industry , federal rates up and incentives are down . According to the National Association of Realtors last May 08 , 2007 , U .S . home-price declines this year will be steeper than earlier forecast because of the drop in sub prime mortgage lending and the adoption of stricter loan standards (Clothier , 2007 . As a further impact of these , entire fixed rate loans are harder to come by there are stricter federal guideline implementations and fewer first time buyers will qualify for a loan . If this go on for a much longer time , consumer spending - especially for houses will affect overall consumer and economic activity and the domino effects in the US economy will be felt soon enough

One other factor that comes into the present investment environment is the continuing increase in the price of oil . Consumer activity is further dampened by this disturbing trend . We all know that when oil prices go up , all the prices of other consumer products go up as well Consumers know this and when bracing for the worse , consumer spending is slowed down . People tend to hold on to their money at times like this To further illustrate , Daniel Pimlottin wrote in his article entitled Housing slump brings woes for Lowe 's ' in the Financial Times published last may 22 , 2007

Last week , Home Depot said its earnings had fallen 30 per cent in the first quarter as housing troubles and high energy prices depressed consumer demand (Pimlottin

Clearly , there is a slowdown in home prices in more cities than there is appreciation in some . In Table 1 , we can pinpoint 14 cities that have two digit appreciation indexes . However , there are 84 cities that have negative increase or depreciation in residential home prices or a flat line which is neither an increase nor decrease

All is not lost though . The future is not that bleak either . There are some positive factors and developments today that were not present in past housing booms and bust cycles . For one , unemployment is still at a low and manageable level . It is just 4 .5 per cent as of April 2007 (Growth Conundrum , Financial Times . Growth is slow at 2 percent (Growth Conundrum , Financial Times ) but at least inflation rate has also slowed to 2 .3 - also as of April 2007 (Pimlottin , 2007 . Interest rates have been maintained at 5 .5 by the Federal Government (Pimlottin 2007

However slow , a positive growth in the US economy is still a postive sign that the Federal government agencies are looking for . Although at 2 percent , it is not enough to warrant a decrease in interest rate since August 2006 (Pimlottin , 2007

III . Conclusion / Recommendations for would be buyers

What should first time home buyers be looking out for

The question now is how do all these relate to first time buyers or those who still dream of owning a home ? When is the right time to buy Is there a right time to buy ? If yes , what do we look for

First , first time homebuyers should know if they are ready or not to take the plunge . The new stricter federal guidelines are applicable only to high risk borrowers . But with federal rates still at a relatively lower rate , and if you have the necessary requirements and a good credit score , there is relatively few things to worry about . Still it can help though to look for indicators when it is a good time to buy . The indicators may consist of different economic signs . First everybody nowadays seem to be saying that after the downtrend started in the last quarter of 2006 , they say that it is now a buyer 's market because prices have started going down . Although it is not true for all the cities and states in the US , you can do a little bit of research such as looking in Table 1 that show which cities have increase home prices and which ones have declining home prices . The trend is likely to follow through during the next few months . As I cited much earlier on , some cities still have home price gains because of other factors such as location , city economy and employment opportunities . The two latter indicators help increase and trigger a demand for new and available housing . Now , when houses are depressed in some cities and communities , it might appear like a good bargain , but when you are also moving into that city and would soon be looking for a new job , you might want to consider not just the home prices but also look how healthy the city or community 's economy is

Another scenario would be if you look for a house to buy where you are at right now and find that prices have relatively stabilized , then more likely than not you are at the right place at the right time . This is because you probably have a steady job where you are at right now and one thing that lenders or creditors look for with first time home buyers is a history of employment and credit worthiness

One reminder or word of caution though , always remember that the mortgage that you should consider available is one that will only cost you a third or less than a third of your household 's net income Anything more than this will prove to be a hardship for you and your family . House payments - if they are within the affordable rate of a third of a household 's income is a viable long term commitment than getting something that is out reach hoping the household income will increase in the near future . It is better to start small and affordable rather than risk everything for a bigger mortgage . Remember , buying a house is the single biggest investment that you and your family can commit to . Hence , making sure all the indicators are favorable to your making the mortgage payments in time . Otherwise , you might join the predicament of the housing cycle - that is - the busted end of it

References

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