Prices Coming Back to Earth, Economists Say

Daily Real Estate News | October 10, 2006

Nariman Behravesh, chief economist for Global Insight, an economic and financial information company, says home prices are “coming back to earth, coming down of their own weight.”

In a recent teleconference hosted by the National Association of Home Builders, he predicted that home prices could drop 5 percent nationally over the next year to a more regular level and that the housing slowdown's “spill over to the economy would be modest.”

That's similar to the recent outlook from David Lereah, chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

“Unlike previous housing slowdowns, which have come on the heels of broader economic weakness accompanied by job losses and rising interest rates, today’s slowdown comes amid an economy that continues to chug along at a respectable pace," he said in his October 2006 column in REALTOR® Magazine. "Continuing solid spending by consumers and businesses, steady government spending, a recovering stock market, and strong corporate profits are behind the steady growth.”

Orderly Retreat in Home Sales

“The key issue is whether the correction is orderly or disorderly. What I see is orderly,” says Mike Moran, chief economist for Daiwa Securities America Inc. “The press tries to portray this as a catastrophe and I don’t think that is the case. Certainly prices are high and need to be corrected, but it isn’t a desperate situation.”

Using a historic perspective, Moran says that prices actually are in line with the rate of appreciation in that we saw in 2003, which at the time was a record year for housing. The effect of flattening prices or declines in some markets has been “to squeeze out the exuberance that was in place in 2004 and 2005,” he notes.

The rapid adjustment in prices and modifications that builders are making in production could be signs that the correction might proceed faster than expected and “things could bottom out faster than you see in the numbers,” suggests Jim Glassman, managing director for JP Morgan Chase.

Still, all three back NAHB Chief Economist David Seiders’ assessment that the correction would continue through 2007, hitting bottom in mid-year. Hardest hit will be metros in the Northeast, Florida, and California, where home prices are overvalued by an average of 30 percent to 35 percent, Behravesh says, referring to a survey of housing prices in 300 metro areas that his company and National City Bank conduct quarterly.

Safety Nets

For the economy overall, Behravesh anticipates the gross domestic product growing 3.4 percent for this year and 2.2 percent next year.

Still, strong global economies, record corporate profits, a healthy stock market, falling interest rates, and strong exports were described as “safety nets” during the period of adjustment.