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Thursday, December 21, 2006

MarketWatch: "Housing to Stabilize in '07"

by Calculated Risk on 12/21/2006 01:27:00 AM

From MarketWatch: Housing market got buffeted in 2006, expected to stabilize in 2007

... unlike some people had expected, the switch didn't follow the deafening "pop" of a massive real estate bubble.

...the correction wasn't as harsh as some had feared. In fact, the year as a whole might even have been described as "healthy" if the country's perspective hadn't been skewed by the boom of the past few years, said John McIlwain, senior fellow for housing at the Urban Land Institute. The market is still "well within long-term norms," he said.

"I think the story of the year is the bubble that wasn't," McIlwain said. "Instead of a bubble busting, so far it has been a healthy correction."
And there is plenty more "don't worry, be happy" talk in the story. But the problem with the story line is the bust was worse than most observers expected:
"The housing market, as you know, it has been hit, I think, harder than most of us had expected."
Edward Lazear, Q&A Nov 21, 2006, chairman of the White House's Council of Economic Advisers
"I guess we are a bit surprised at how fast this has unraveled," said [Tom Zimmerman, head of ABS research for UBS]. Nov 22, 2006 on Subprime mortgages.
"Fifteen percent is pretty much in the bag for Orange County in 2006," [Gary Watts] says. "It's impossible for prices to go down this year."
Gary Watts,Feb, 2006, Orange County Broker
Note that year-over-year prices in Orange County were flat in the most recent survey, and will probably be down for the year.

I'm not sure who expected housing to "pop" in 2006. The author doesn't quote anyone.

However, housing "bubbles" typically do not "pop", rather prices deflate slowly in real terms, over several years. As I've noted before, real estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.

This means real estate markets do not clear immediately, and what we usually observe first is a drop in transaction volumes. That is what happened in 2006. And that is about what I predicted:
In my opinion, the Housing Bubble was the top economic story of 2005, but I expect the slowdown to be a form of Chinese water torture. Sales for both existing and new homes will probably fall next year from the records set in 2005. And median prices will probably increase slightly, with declines in the more "heated markets".
Now comes 2007, and I expect falling prices, falling transactions, falling starts, falling housing related employment, falling home equity extraction - lots of falling - but not everything will be falling: foreclosures will be rising.

I wonder how this writer will characterize the surprises of 2007?