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A little good news about real estate

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"For the vast middle part of the country, we are actually seeing price increases. We found that only about one-third of the MSAs (Metropolitan Statistical Areas) were actually seeing prices contract," Yun says.

Moody's economist Patrick McPherron isn't so confident about a fast housing recovery and anticipates the market staying down at least through 2008. He says that a weakening in the economy and financial markets, combined with higher guidelines for mortgage lending, will drive down demand. The homeownership rate peaked at 69.2 percent in 2004 and now stands at 68.2 percent. McPherron says that 1 percent difference may seem insignificant, but shows a steady decline and means that a lot more homes will likely go unsold.

Downward pressure continues
"There is constant pressure on supply that is just now starting to alleviate, and you have all these additional homes coming in because of foreclosures and short sales. You now have an enormous amount of supply facing restricted demand and prices have to come down (further)," says McPherron.

Paul Kasriel, chief economist with Northern Trust in Chicago, also anticipates further weakening in the housing market because of growing inventories. He also believes that the wave of foreclosures isn't over and points to the $683 billion in subprime mortgages that are due to reset between now and the end of 2008. Those foreclosures will put even more homes on the market that will likely be sold at a discount by creditors that take possession of the homes.

"I think traditional families will buy the homes as opposed to investors. The growth rate will be steadier as opposed to the ramp-ups that we've recently seen."

"I think you'll see an increase in auctions with prices being slashed. I think prices are still going to be weakening for a while and it looks as though we're only in the early stages of homeowners capitulating in terms of their asking prices," says Kasriel.

While the housing downturn may not be good for the overextended homeowner or mortgage lender left holding the bag, many economists agree that it is healthy to make a transition to a housing market driven on fundamentals instead of speculation. McPherron says that in recent years, homes were being treated more as assets than consumption goods. That mind-set, combined with low interest rates and new mortgage innovations, including interest-only loans and teaser-rate adjustable mortgages, caused people to rush into houses not in search of shelter but high returns.

The waiting game
"The shift is going back toward the real value of the home because the price is so high that people are wondering if they should be in a home or if they could wait for a year for prices to come down," says McPherron.

Yun also believes there was an excess push in the market through speculation. He points to the fact that the markets with the largest number of investors and speculators, such as Florida, Nevada and Arizona, had the biggest excess in price increases. As home prices started to decline, many of the investors were put upside down and the demand from that group has quickly disappeared.

"On a long-term horizon, things don't look that bad. We're just moving through all these excesses that occurred. The markets that had a large investor presence are the markets that are seeing a major decline," says Yun.'s corrections policy -- Posted: Nov. 8, 2007
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