The roof isn’t falling
KEEPING TABS ON THE HOUSING market can feel a lot like listening to the “Chicken Little” story over and over again. Month after month, as interest rates rise and building starts stumble, we hear that the sky is falling. But every month, home sales continue at a healthy clip, buyers still get loans and the sky stays up.
Our faith in the sky, however, was severely shaken last week when former Federal Reserve Chairman Alan Greenspan and his successor, Ben Bernanke, in separate speeches, announced the end of the housing boom. They are certainly correct that the market is slowing. But the sky still isn’t falling.
The history of the boom is familiar by now. Lured by low interest rates and adjustable-rate financing, Americans bought real estate in the ‘00s the way they bought tech stocks in the ‘90s, pushing prices to levels that would have seemed nuts just a few years before. Or a few months before. In the first half of 2005, the median price of a house in California jumped 12% to $542,720. Five years earlier, it was $244,230.
Bearish pundits have been saying the end was nigh for years, but now more numbers are turning in their favor. So far this year mortgage delinquencies are rising nationwide, a sign that borrowers may be having trouble keeping up with rising adjustable-rate loan payments. Houses now sit on the market for weeks or months instead of days. In April, sales in Southern California dropped 21.3% from the year before -- more precipitously than they had in 11 years. Prices haven’t followed suit, but they are leveling off.
So why do we think the sky isn’t falling? Economists disagree on how large the decline ultimately could be. Some say prices will remain level; others think they could fall as much as 30%. Whatever the damage, it could take many years to play out. There’s also a big difference between mortgage delinquency and default. Barring a major recession, most homeowners should be able to hunker down and hang on to their property long enough for incomes to catch up with price levels.
In other words, unless you’re a real estate agent, mortgage broker, builder or go-go speculator -- and nowadays, we realize, that includes a distressingly large number of people -- this housing slump isn’t going to bonk you on the head like a falling acorn.
What’s more, though it’s a detail that’s often overlooked in a town that fetishizes homeownership, most Angelenos are renters. According to U.S. census data, more than 60% of people here rent their residences. So if prices do start to fall precipitously, there may be a lot of potential buyers on the sidelines waiting to pounce.
