How bad will the 2007 housing market be?
Economists predict that next year will be tough, but say some metro areas will hold up nicely and the future may not be as gloomy as some fear.By BusinessWeek.com
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Americans are increasingly nervous about the real estate market in 2007. They have good reason to be. But the news isn't all bad: Interest rates will remain at historically low levels, homebuyers will see more opportunities, and, best of all, for those planning for the long term, 2009 could be primed for a comeback.
To gauge what the next 12 months might look like, though, BusinessWeek.com asked economists at leading real estate research firms to provide their outlooks for the housing market in 2007. The less-than-festive consensus: Home prices will continue to fall in some markets, and the rate of price appreciation will slow in most places. Declines in homes sales, which directly influence price trends, will set the stage for another year of price decreases in 2008. Foreclosures will continue to increase. For those struggling to hold onto their homes, their net worth will shrink as these homes lose value. Long-term mortgage rates will rise. Housing starts will see double-digit depreciation, the sharpest decline since 1991, the worst year for housing starts on record.
Grim as that might sound, there are some bright spots. Nationwide, home prices will be flat to up slightly in 2007, with many large markets seeing small increases. While new home sales will be down for the year, existing home sales will also be flat. And housing starts won't see as sharp a decline as they did in the early '90s or early '80s.
Another reason for optimism (keeping in mind that expectations are somewhat lower this year): For many, the ongoing market correction will make the dream of buying a home a reality.
"In so many of these markets, housing became extremely unaffordable," says David Stiff, chief economist at financial data processor Fiserv Lending Solutions, who expects average U.S. home prices to appreciate only 0.1% overall in 2007. "Prices moving back in line with household income sets the stage for price appreciation in the future."
Blame the rapid run-up in prices on speculation. Taking advantage of low interest rates and good economic conditions, investors drove prices to new heights in the first half of the decade, so they could flip purchases for profit. Some markets saw price appreciation rates of as much as 50%, versus the average annual rate of about 10%.
But as interest rates rose and the gap between income and housing costs widened, homebuyers never materialized as expected. Investors have now been forced to dump their property on the market, flooding many places with homes for sale and forcing prices to a more realistic level.