The Balancing Act of Today's Housing Market

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The Balancing Act of Today's Housing Market
December 2005

Homeowners and buyers have been searching for any signs that the nation's robust housing boom may be going bust - especially in light of recent reports that the market is cooling. But NAR's chief economist, David Lereah, assures us there is no reason for panic. The housing market may be slowing down, but it's still strong and healthy.

Lereah says the housing boom has peaked. "We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing," he says. Read on for excerpts from some of Dr. Lereah's most recent speeches and media interviews:

Balloons, not bubbles
Rather than housing bubbles, Lereah likens today's housing markets to balloons. "Balloons don't burst," he says. "You can put air in a balloon and it expands or you can take air out and it shrinks. Various metro markets got real hot over the last four years. Air went into those balloons and the prices went up. But now, air is coming out of the balloons. We're hearing a hissing sound not a pop.there's a soft landing ahead."

From sellers' markets to buyers' markets
"Sellers' markets are transitioning to buyers' markets," Lereah says. As inventories rise prices soften somewhat, many buyers get the break they've been waiting for and are able to get into the market.

More homes to choose from
"We've been waiting for inventories to go up for the last two years. Inventories are the big problem in the housing market. They've been too lean," says Lereah. "We want inventories to rise a bit so that demand and supply can get into better balance with one another. The recent boost in inventory levels means that buyers will have a wider choice available to them, and the significant price appreciation shows that demand is still there as markets continue to balance themselves."

The biggest risk
The biggest risk in the housing markets today is speculative buying, according to Lereah. It's highly concentrated in a few markets like Miami, San Diego and Washington, D.C. "If interest rates continue to rise, those speculators will sell. When these speculative purchases go on the market all at once, there could be a glut and prices could soften considerably," Lereah says.

The fundamentals of a strong housing market are still in place
Today's unprecedented housing streak rests on some real-world fundamentals, according to Lereah. He notes that jobs are plentiful, immigration is fueling demand, incomes are rising and the boomer bulge is reaching 50-60 years old - the age group that controls substantial wealth.

The housing market drives the economy
For the last four years, the housing market has been driving the economy in a big way. If the housing market slows, then the economy slows, Lereah explains, "Over the last five years, homeowners have accumulated about $4 trillion in wealth through their home equity alone. People spend from that wealth and the rest of the economy benefits. Even though they may not sell their homes, they feel richer. They also take out equity lines and spend money that way." Much of this is starting to slow down, he says.

To buy, or not to buy
Lereah advises: If you're not a homeowner and you're thinking of purchasing a home -- do it! "As a property owner, you'll benefit from equity and wealth gains over the long-term. If you expect to keep the home for at least four years, there's more risk to staying out of the market than getting in." He adds that buyers are still looking at historically low mortgage rates - even though they've risen, they're still hovering around 6.25 percent. "That's low-cost financing, and I would take advantage of it."

Learn more about NAR Chief Economist David Lereah