Vashon Homes & Events from Go! Real Estate

Vashon Island Housing Market Forecast: The Well-Informed Consumer

December 19, 2008 at 3:38 am Leave a comment

I recently attended a two-day seminar on Real Estate Law offered by the Pennsylvania Bar Institute in Philadelphia.  Among the presentations on Commercial and Domestic Mortgage Foreclosures, Defending a Residential Foreclosure Action, Sheriff’s Sales, Tips on Landlord / Tenant Evictions, and other sobering topics, was an outstanding presentation by Dr. Susan Wachter, Professor of Real Estate and Finance at the Wharton School of Business, Dr. Jesse Abraham, Wells Fargo Home Mortgage, and Professor Adam Leviton, a specialist in bankruptcy and commercial law at the Georgeton School of Law, called “Why Here, Why Now, and What Next?” 

The speakers presented a concise overview of the financial causes of the crisis in the housing market and, more significantly, offered an outstanding analysis and forecast for the market recovery.  The presentation was sobering but instructive and relevant to home sellers and buyers and worthy of consideration.

My intent here is to summarize the presentation and to invite readers to contact me via this blog to develop a more detailed discussion of the issues touched upon here.

It is important to underscore that the economic circumstances that coalesced to form the recent boom and bust in the housing market are NOT historically unique and are manifestations of normal housing market behavior.  The difficulty is that while housing price increases through 2003 were justified by fundamental economic principles, price rises AFTER 2003 were not.  Post-2003, in a nutshell, as the popular press has reported, investment packages created on Wall Street artificially sliced apart the degrees of risk associated with unregulated mortgage lending (“tranching”) and severed the relationship between the actual property securing the mortgage from the investment instruments.

The federal government is now involved with spending hundreds of billions of tax dollars to guarantee the investments of major financial institutions into these bogus packages.  The effectiveness of the Fed’s strategy will play out over time.  What, if any, regulatory response to govern mortgage investment practices might arise also remains to be seen.

Today’s home sellers and buyers are more immediately interested in the prognosis for market recovery.  The historical occurrence of housing market boom and bust cycles offer guidance on this issue.

The housing market is a function of factors that influence supply and demand.  Among these factors are the formation of new households  (in turn a function of demographics and population fluctuations), the demand for second homes, and the replacement of deteriorated or obsolete structures.  New households command 70% of the demand.

Complexities increase as one looks at local markets, where such factors as migration patterns, employment opportunities and wage trends, demand for vacation properties, etc. influence analysis.

Of particular note is the function of immigration on the housing market.  The last decade witnessed 400,000 new potential home buyers each year entering the country, leading to a recent surge in demand for homes and influencing an increase in sales prices.  The national homeowner rate increased steadily from 1995 until 2005, well into the period after 2003 when high risk mortgages began to proliferate.

The bottom line is that house prices after 2003 were unjustifiably sustained by consumer confidence in the fiction of high risk mortgage practices. 

Historically, housing market booms and busts occur within two-and-a-half to five year cycles.  The speakers at the PBI seminar suggested that an additional five years will be required to stabilize the market in order to reach former price levels.  This time period is necessary to clear out the existing glut of housing inventory and stabilize the market, topics which have been discussed in other postings to this site.  This projection will be influenced by myriad factors including uncertainty in the Federal bailout programs and consumer confidence.

All this means that sellers and buyers in today’s market should be aware of the factors in play as they set their sales price or purchasing budget.  For a seller, simply holding fast to a price established by the artifical market post-2003 is generally ineffective in enticing  buyers.   For a buyer, an awareness of historical trends should help to determine the appropriate financial circumstances under which to pull the trigger and finance a purchase.

The good news is the historically the housing market has always recovered and if a seller or buyer can weather the current disruption with intelligent analysis of the economic fundamentals involved, then smart market decisions can be reached.  Informed consumers on both sides of a house sale transaction will help to stabilize the market immensely.

As always, Iwelcome feedback on this column.  Happy Holidays!

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Entry filed under: • Real Estate, Housing Market News. Tags: Seattle home finance, Seattle mortgage, Vashon Island home finance, Vashon Island mortgage.