Tough real estate year ahead, but it's getting better

It will take some time, but sales and prices should start rising again next year.

Q. Home sales in my neighborhood are really slow, and prices are down a little bit from where they were several months ago. When do you think that the market will get better?

A. I think that the nation's housing market is finally bottoming out, but that most parts of the country won't see any major improvement in sales or prices until the second half of 2008 -- or even the start of 2009.

I've received a number of letters like yours in the past several weeks, so I'm devoting this entire column to answering some of the most common questions as part of my annual housing-forecast column.

Q. What triggered the current housing slump?

A. There are a number of factors. For starters, prices in many areas doubled or even tripled between 2000 and 2005. The prolonged price run-up pushed housing-affordability levels to record lows, which gradually knocked millions of buyers (especially first-timers) out of the market because they could no longer qualify for a mortgage. The dwindling number of buyers then resulted in a nationwide decline in both prices and sales that began around the start of 2006 and continues today.

Another factor in the downturn: Many of the loans that were made during the past few years were given to buyers with below-average credit scores and with small down payments. So when prices stopped rising about two years ago, many of those buyers simply decided to stop making their monthly payments because the balance of their mortgage was higher than the value of their house.

Foreclosures then began to mount, and the number of homes for sale by both private sellers and banks rose, which depressed values further -- even for those longtime homeowners whose steady payments through the years had helped them earn a perfect credit rating.

When you add to this nasty mix the sluggish economic growth and massive layoffs that we've seen in the past couple of years, big swings in mortgage rates and a Congress and president who have spent the past several months bickering over the different methods to help troubled borrowers and ailing lenders -- well, you've got all the ingredients for the "perfect storm" that struck our nation's housing markets about two years ago and still wreaks havoc today.

Q. Considering all these problems, why do you think that things will get better in 2008?

A. In part because lenders, Congress and the Bush administration finally now seem to be taking the crisis seriously. Some banks have recently agreed to provide interest-rate help or other aid to troubled borrowers facing foreclosure, which should help reduce the number of homes for sale across the country and eventually prop up prices for everyone. Lawmakers and the president are also arguing less and instead concentrating on pushing a comprehensive package of tax changes and other measures that also should improve market conditions.

Perhaps more important, the interest-rate-setting Federal Reserve Board is taking a more active role in cutting rates to spur the economy while simultaneously helping ailing banks and their financially troubled borrowers. The Fed recently cut rates for a third time in the past four months, and hinted that it was ready to make even more reductions in the future.

Reducing interest rates never leads to an overnight improvement in the economy or housing markets, but it almost always leads to longer-term gains in job creation and consumer confidence -- perhaps the two most important ingredients for a stronger real estate market that sends prices higher.

Q. It seems like every time that I pick up the newspaper or turn on the TV, there's another story about how home sales and prices are dropping. Aren't there any areas where prices are still going up, instead of down?

A. Yes, there are lots of them. Though nationwide sales are running about 5 percent below last year's pace, sale prices are still higher than they were a year ago in nearly two-thirds of the nation's 150 largest metropolitan markets, according to a detailed report that was recently compiled by the National Association of Realtors.

More than 25 of those markets had price gains of more than 6 percent from a year earlier, a figure that's about twice the nation's overall inflation rate.

The largest gains of all were reported in small or midsized markets that can still be afforded by first-time buyers, or by older homeowners who are selling their property in bigger cities and using some of the profits that they have built through the years to buy a smaller (but often nicer) retirement house in a tinier community.

Those markets, where prices are still rising at a double-digit annual rate, can be found in every region of the country. They include Binghamton, N.Y.; Charlotte, N.C.; and Beaumont, Texas. They also include Bismarck, N.D.; Salt Lake City; and Yakima, Wash.

It's going to be another tough year for housing in 2008, but I think it will get better sooner rather than later.

© 2007, Cowles Syndicate Inc.