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The slowing housing market: Causes and effects
The so-called bust of the “housing bubble” is all anyone can talk about right now. Every newspaper and magazine available touts some story or sideline on the slowing housing market.
Everyone is wondering what happened to the market and why this is all happening so fast. It seems like just days ago when houses were selling in a week for double the price the seller paid for it. But those days are now just memories, as houses sit on the saturated market for months without so much as a looker.
An August 30, 2006 article by Karl E. Case and Robert J. Shiller of The Wall Street Journal, “Full House,” give some good insight into the causes of the slowing market and the effects it is having on the economy and general public.
“Looking back at past housing booms, the first sign of the end is when a goodly share of buyers stop making offers and eventually stop looking, seeming to just disappear. In the spring of 1987, during another U.S. housing-market boom that was starting to lose speed, Nora Moran, president of the Greater Boston real estate board, said ‘someone blew a whistle that only dogs and buyers heard.’”
“Across America today, it is as if the whistle has again been blown. New home sales in July are 22% below July 2005. The decrease is 43% for the Northeast over that same period, and the inventory of unsold new homes is up 22%. Existing home sales are down to 6.33 million in July from over seven million at the end of 2005. Older boomers are cashing out of valuable suburban homes and heading for condos in the city, or out of high-priced regions altogether.”
Many people are wondering why the ‘bust” is happening right now, since it can’t be completely blamed on interest rates alone. Yes, the Federal Reserve did raise rates a consecutive 17 times in a row, but they are really not much higher than they were last year, less than one percentage point in fact.
The buzz surrounding the slowing market could be what is causing the slow down in sales.
“Talk is part of what changes the mood and actions of buyers, and the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America has heralded the bursting of the ‘housing bubble.’”
In addition to the speculation about the market, the sheer size of this “boom” in comparison to other ones of the past is fuel for conversation and assumptions alone.
“Part of what has focused the spotlight on the housing market has been the sheer size of the boom. Ten years ago, U.S. household holdings of real estate were valued at just under $8 trillion, about 40% as large as household financial wealth. At the end of 2005, real-estate holdings were $21.6 trillion, 56% as large as financial wealth. Just in the last five years, the total market value of residential real estate alone has increased by nearly $10 trillion.”
The reason why this housing slowdown seems so big is because it is on the tails of a huge increase in the sale and inventory of homes. If this housing boom would have been smaller, the slowdown would not have been as bad.
“As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility if the U.S. can avoid a generalized inflation, if long rates don't rise a lot, and if the rest of the economy stays strong. But that possibility is not enough to give great comfort to all those who worry today about the housing market.”