Is the Party Really Over for the Housing Boom?

By June Fletcher
RealEstateJournal.com

Question: Is the air really coming out of the housing market? Every open house I go to has so many prospective buyers around. People are still getting multiple offers. I am really confused. I am planning to invest in a home, but I'm scared. Please advise whether I should wait or go ahead.

-- Shweta Rao, San Francisco

Shweta: These are the times that try men's souls...when the housing market is in transition.

Anyone who has been reading the newspaper these days has to be nervous about the state of the housing market. Let's look at the statistics: According to the National Association of Realtors, existing-home sales are expected to decline 4.7% to 6.74 million this year, down from a record 7.07 million units in 2005. New-home sales are expected to fall 8.5% to 1.17 million from a record 1.28 million last year. The trade group predicts housing starts, or the number of new homes built, will reach 1.87 million units this year, down 9.3% from the year earlier. The national median existing-home price for all housing types is expected to increase 5% this year to $219,200, while median new-home prices are projected to rise 5.7% to $250,900. That's about half the rate of home-price increases last year. Meanwhile, this week, Toll Brothers, a leading luxury home builder, slashed its sales forecast for the second time in three months, while the Mortgage Bankers Association announced that mortgage activity declined for the second straight week, as 30-year fixed interest rates hit 6.25%, their highest level since early December.

Sort of sounds like the party is over, doesn't it?

But wait, there's more: Data keepers in your part of the world aren't too cheery, either. DataQuick Information Systems, a La Jolla, Calif., information provider, recently reported that foreclosure activity is on the rise throughout the state. In the Bay area, foreclosures rose 10.5% in the fourth quarter of 2005 over the year before, due to slowing housing-price appreciation. People can no longer expect rising home equity to bail them out when they lose their jobs, divorce or suffer other kinds of financial reversals, the company says. The California Association of Realtors reported that existing home sales in the state decreased 17.6% in December from the same month a year earlier.

Data are only numbers, however. And the real-estate market, more than any other, is intensely local. As you've discovered, even though most experts have pretty much unanimously declared the housing boom over, there are pockets where supply is so scarce and demand so high, that bidding wars still occur; just as there were pockets, particularly in the Midwest, that never saw double-digit windfalls at any time during the boom.

So should you wait to buy? Maybe. If nothing more is fueling the bidding wars in your neighborhood than fear and habit, then it makes sense to wait. Unless a big local employer leaves town, real-estate markets rarely change overnight. It usually takes several months for sellers to realize a market has shifted and to lower their prices, and for buyers to understand that they finally have choices and negotiating room.

But if you know you are going to stay in the area for years, and will be able to ride out a cooling real-estate cycle, then keep shopping. Overall, house prices aren't likely to plunge precipitously, even in overheated markets, most economists say. Mortgage interest rates could creep higher in the year ahead, though, eroding your buying power.

Just remember to think of that home primarily as shelter, and not as an "investment." That will help you keep your purchase in perspective, even when frantic buyers all around you are losing theirs.

Back to Special Edition: 2006 Real Estate Guide