Your house will be worth less in 2007 than it was in 2006 or 2005, that’s my prediction for the housing market over the next 12 months: Softer demand, softer prices.
While it may not affect you, the jeopardy to the economy is the large number of 2005 house buyers who bought their homes with 10% or less of the purchase price as a down payment. A 10% swing to the downside in prices, as many markets have already experienced, and the buyer’s down payment is gone. Not a good feeling. And when consumers don’t feel good, they are cautious about spending.
The crashing prices of housing stocks months ago, something I wrote about many times, foretold the story in the housing market. While the Dow Jones Industrial Average has moved to record new highs, the index with all the big U.S. home building stocks, the Dow Jones Home Construction index, is trading at the same level it traded back in the first quarter of 2004!
Right now the Dow Jones Home Construction index, I believe, is starting the left side formation of another head and shoulders pattern that will eventually lead the index down to levels last seen in early 2003–about half what the index is trading at today.
Yes, the stock market is big. And yes the real estate market is big. When either of these forms of investment and value declines, consumer sentiment is damaged, consumers stop spending and the economy gets hurt. While U.S. home ownership is now at a record high of about 40%, not everyone owns stocks! So when house prices decline, the negative effect on consumer spending is magnified to a greater degree than when the stock market declined in value.
Construction is a big part of the economy. When houses aren’t being built, when the construction job market goes from tight to soft, the ramifications to the economy are huge.
I’ve been a real estate man for half my life. I’ve seen how soft property markets can wreak havoc on town and cities. Unfortunately, many of today’s young analysts and economists have never bought an investment property… nor have they been around to see what a housing recession is like.
Buying houses (be it a primary residence, second, or third vacation home), has never been so easy. The Fed and the banks made it so easy for home buyers to qualify for loans and mortgages with so little money down. Now we need to pay the price for all that euphoria.
My analysis: 2006 will not be the bottom of the housing market, as 2007 will place an even greater strain on housing prices and the economy.