Economist Tells Builders to "Keep Things in Perspective"
NWREporter December 2006
"Up" is the direction for housing, according to Economist Stanley Duobinis, Ph.D. Speaking at the 10th annual Builder Appreciation Breakfast hosted by John L. Scott Real Estate, Duobinis, the president of Crystal Ball Economics, refuted media reports of "collapsing home prices," reminding his audience that 2004 and 2005 were exceptional years for home sales.
"Keep things in perspective" Duobinis advised, whether reading newspaper headlines or housing data. As an example, the outlook for housing indicates a continuing slowdown, followed by a turnaround in 2007 and upturns in 2008.
To put this mixed outlook in perspective, think of it like swimming under water for the length of a pool, Duobinis suggested. "If you can hold your breath long enough, you'll get through it," he stated.
As a former director of forecasting at the National Association of Home Builders, Duobinis now specializes in forecasting and analyzing the housing market.
The U.S. economy is doing "fairly well," Duobinis reported. Employment is growing, inflation is under control, but there is contraction in the housing market. However, he contends, inaccurate media reports are contributing to a "false crisis" and misperceptions. One consequence is eroding consumer confidence and hesitancy among prospective purchasers.
In the Baltimore area, for example, where his business in based, headlines read "house prices collapsing." In reality, price increases have slipped to 2.2 percent from year-ago gains of around 20 percent. "I can only pick out three other years that are better," he stated.
Acknowledging homes are appreciating at a lesser rate than the double-digit hikes of a year ago, the economist assured the 200-plus industry professionals in the audience that "The housing market is not failing apart. Keep it in perspective," he reminded them. Even though declines may occur in specific markets and we're in the midst of a mild downturn locally, there are very few investments that can produce the same rate of return as housing has, he noted.
Could price declines snowball? Not likely, according to the speaker who cited four reasons to support his belief:
They never have before.
It's not likely that we'll see a large decline in nominal terms.
History shows the market may adjust in real terms.
The risk is not the same across the country.
In analyzing trends for the volume of new and existing home sales, Duobinis anticipates up to four more quarters of declines, but believes "Basically, we are on a path to rising home sales."
Changing conditions are affecting the outlook for housing in several ways:
The market is adjusting to a lower level of sales,
Higher inventory levels are causing builders to scale back production,
Some builders are being forced to lower prices to move existing product,
Production levels should decline.
The Greater Seattle area is faring better than many regions elsewhere in the country, thanks in part to a rosy employment outlook and population projections, both of which drive housing.
Interestingly, while housing starts usually align with employment growth, in Washington state they're lagging.
Also, despite considerable media coverage about the volume of new condominiums in the pipeline, Duobinis does not expect the proportion of multi-family homes to alter much, hovering around 25 percent of starts and sales activity. (Editor's note: Through 10 months of 2006, condominium sales accounted for about 26 percent of residential sales in King County, according to the latest figures from Northwest Multiple Listing Service)
Population growth is another factor the drives the housing market. In the early ‘90s more U.S. citizens left Seattle, but those departures were offset by international migration. In 2005, both components increase. Duobinis projects more domestic migration to Seattle.
On the downside for Seattle area homebuilders, Duobinis noted the scarcity of buildable land within urban growth boundaries is causing lot prices to soar, and ultimately house prices.
Also trending upward is the size of the typical new home. By 2007, the newly built single family home will average 2,310 square feet; twenty-five years ago it totaled 1,375 square feet. Condos are also larger, expanding from an average of 887 square feet in 1971 to 1,175 square feet by next year.
NWREporter December 2006
"Up" is the direction for housing, according to Economist Stanley Duobinis, Ph.D. Speaking at the 10th annual Builder Appreciation Breakfast hosted by John L. Scott Real Estate, Duobinis, the president of Crystal Ball Economics, refuted media reports of "collapsing home prices," reminding his audience that 2004 and 2005 were exceptional years for home sales.
