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Has Housing Cycle Hit Bottom Yet?

It's no secret that the U.S. housing market is cyclical and in the midst of yet another painful correction. The causes and characteristics of these cycles vary, at least in some respects, but the implications for home buyers, home sellers and homeowners remain reliable as the cycles roll by. Housing cycles aren't all alike, yet over long periods of time, a basic pattern can be discerned, explains Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University, as reported in the Seattle Post-Intelligencer recently.

Housing cycles aren't all alike, yet over long periods of time, a basic pattern can be discerned, explains Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University.But there is always another way to look at any situation.

A cycle doesn't really have a start or a stop, but to pick a point at random, we might say that a housing cycle "starts" when economic activity heats up and interest rates rise. Higher interest rates make housing less affordable, so demand decreases and home prices fall. As economic activity slows and interest rates decline, housing becomes more affordable and, consequently, demand and prices go up. Then the cycle repeats.

The severity of the current housing cycle has been worsened, Dotzour explains, by two factors:

Lenders flooded the housing markets with subprime loans that enabled borrowers who had poor credit to buy homes they otherwise wouldn't have been able to afford. Demand outstripped supply and prices rose too fast.
When these risky borrowers weren't able to pay back their loans, the lenders cut off the easy credit. Builders, who had expanded to meet the new demand, couldn't stop building fast enough to match the disappearance of buyers. Supply exceeded demand and prices dropped too quickly.

"In this cycle, we had a real abrupt change in demand (because) a certain segment of the home-buying public, mainly subprime and Alt-A buyers, were just completely shut out of the market overnight," Dotzour says. "Then what happens is that you get too much inventory and prices go soft."

The chief risk that cyclicality poses for home buyers and sellers is that local home prices may fall further as the cycle deteriorates.

Whether the current phase is a prudent time to buy depends on an assessment of future prices. Two indicators -- builders' concessions and loan delinquencies -- may suggest prices have bottomed out, Dotzour says.

The "most fundamental" indicator is whether home builders still are offering price concessions and extra amenities to buyers. As long as concessions are on offer, buyers should be wary, Dotzour suggests. Yet builders' concessions can be very attractive, especially for buyers who plan to own their new home for at least a couple of years.

"If you are going to stay more than two years, now might be a good time to buy one of these heavily discounted homes on which builders are offering major concessions. ... The supply and demand situation is liable to correct itself within about 24 months or so, and at that point, those concessions will be gone," he says.

Another indicator is the rate of late payments on subprime mortgages. Since the delinquency rate on each "graduating class" of mortgages tends to peak about 18 to 24 months after the loans were originated, the mortgages from 1999-2005 have already peaked, the class of 2006 is starting to peak and the class of 2007 is "still going through the roof with no sign of abating," Dotzour explains.

Homeowners who plan to stay put needn't worry overmuch about housing market cycles, experts agree. "Over the long term residential real estate does OK," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.




	Headline News Has Housing Cycle Hit Bottom Yet? It's no secret that the U.S. housing market is cyclical and in the midst of yet another painful correction. The causes and characteristics of these cycles vary, at least in some respects, but the implications for home buyers, home sellers and homeowners remain reliable as the cycles roll by. Housing cycles aren't all alike, yet over long periods of time, a basic pattern can be discerned, explains Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University, as reported in the Seattle Post-Intelligencer recently. Housing cycles aren't all alike, yet over long periods of time, a basic pattern can be discerned, explains Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University.But there is always another way to look at any situation. A cycle doesn't really have a start or a stop, but to pick a point at random, we might say that a housing cycle "starts" when economic activity heats up and interest rates rise. Higher interest rates make housing less affordable, so demand decreases and home prices fall. As economic activity slows and interest rates decline, housing becomes more affordable and, consequently, demand and prices go up. Then the cycle repeats. The severity of the current housing cycle has been worsened, Dotzour explains, by two factors: Lenders flooded the housing markets with subprime loans that enabled borrowers who had poor credit to buy homes they otherwise wouldn't have been able to afford. Demand outstripped supply and prices rose too fast. When these risky borrowers weren't able to pay back their loans, the lenders cut off the easy credit. Builders, who had expanded to meet the new demand, couldn't stop building fast enough to match the disappearance of buyers. Supply exceeded demand and prices dropped too quickly. "In this cycle, we had a real abrupt change in demand (because) a certain segment of the home-buying public, mainly subprime and Alt-A buyers, were just completely shut out of the market overnight," Dotzour says. "Then what happens is that you get too much inventory and prices go soft." The chief risk that cyclicality poses for home buyers and sellers is that local home prices may fall further as the cycle deteriorates. Whether the current phase is a prudent time to buy depends on an assessment of future prices. Two indicators -- builders' concessions and loan delinquencies -- may suggest prices have bottomed out, Dotzour says. The "most fundamental" indicator is whether home builders still are offering price concessions and extra amenities to buyers. As long as concessions are on offer, buyers should be wary, Dotzour suggests. Yet builders' concessions can be very attractive, especially for buyers who plan to own their new home for at least a couple of years. "If you are going to stay more than two years, now might be a good time to buy one of these heavily discounted homes on which builders are offering major concessions. ... The supply and demand situation is liable to correct itself within about 24 months or so, and at that point, those concessions will be gone," he says. Another indicator is the rate of late payments on subprime mortgages. Since the delinquency rate on each "graduating class" of mortgages tends to peak about 18 to 24 months after the loans were originated, the mortgages from 1999-2005 have already peaked, the class of 2006 is starting to peak and the class of 2007 is "still going through the roof with no sign of abating," Dotzour explains. Homeowners who plan to stay put needn't worry overmuch about housing market cycles, experts agree. "Over the long term residential real estate does OK," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.