February 2008 e-Newsletter

Demand Versus Buyer Hesitation

Real estate remains in the news…we hear it on the networks, we read about it in the paper, and we see it as “for sale” signs in our neighborhoods. The question we keep hearing from our clients is “Will real estate rebound in 2008?” My response has been that I think we will begin to see the local buyers re-enter the market this year. It is unprecedented to have both low interest rates as well as low home prices. I hope that combination of factors is enough to encourage buyers who have been on the sidelines for the past 2 years to make plans to move to move this year. Lawrence Yun, the Chief Economist for the National Association of Realtors, recently commented that he sees the market improving in 2008, but stopped short of saying when in 2008 we could expect it. Excerpts from his article Demand Versus Buyer Hesitation below:

Will housing demand return solidly by spring of 2008 – even after we account for the normal higher sales activity in the spring months? It is a bit uncertain. On the one hand we have a sizable pent-up demand. On the other hand, we have buyers waiting it out, hoping for lower home prices and lower interest rates.

But buyers are hesitant. Why? Anticipated lower home prices are holding back many people from buying a home now. Foreclosures will continue to rise in 2008. There are many research reports and media reports (irrespective of validity) pointing to further price declines. Anticipated lower interest rates are also holding back many potential buyers. It is widely believe that the Federal Reserve will be cutting rates in the next two or three meetings. Though there is no direct relationship between a Fed rate cut and mortgage rate changes, many consumers perceive that mortgage rates will fall with the later Fed rate cut. Given this perception, it would be wise to make a one-time large rate cut rather than a series of small rate cuts in order to end the delay in home buying. Since the Fed Funds rate is likely to be at 3.5% by late spring, why not just cut it to that level (from its current 4.25%) at the next FOMC meeting?

Though pent-up demand clearly exists, it is still tricky to anticipate when a meaningful recovery will take place. I do not foresee any major existing-home sales declines from this point onwards, but sales could remain at their current soft pace for a while. Will it be spring or summer or fall when we will see a notable pick-up in home sales? Difficult to say, but it will happen in 2008.

By Lawrence Yun, National Assoc of Realtors Chief Economist

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