Vol 7 No. 45 - August 1, 2007

Housing slump may be a bust
By Louise Bolger
sun staff writer

What defines a housing bust as opposed to a housing slump? Unless you’re Rip Van Winkle it’s pretty obvious that we’ve been living through a slow down in our local and national real estate markets. But how serious is it and is it a bust that will have a long term affect on the economy or just a blip? If you don’t know the answer, don’t worry, even the nation’s major economists don’t know.

As opposed to the stock market, which generally defines a decline in a major index as 10 percent and a correction at 20 percent, the housing market doesn’t have these defined guidelines. Since declines in housing prices tend to be rare, it has been difficult for economists to accumulate the information necessary to develop a definition of a bust. The last really big decline nationally occurred more than 70 years ago during the depression. In addition, housing markets are more reflective of the regional and local economies than the nation in its entirety. In today’s market, it appears that the country as a whole is declining, however, some regions are in more of a decline than others.

The worst housing market on record was during the 1930s, when housing prices fell 24 percent on average across the country. More recently during the early 1990s, both the East and West coasts of the country experienced a sharp decline of between 17 and 19 percent.

However, economists at the Federal Deposit Insurance Corporation, who have studied housing cycles, have come up with some rules. Their position is that a decline of at least 15 percent for prices not adjusted for inflation would constitute a bust. Mark Zandi, chief economist of Moody’s Economy.com, argues that a better definition would be a decline of 10 percent or more from peak to bottom.

Are you confused yet? You should be. Nationally the median price of an existing home has declined 4 percent since the peak in October 2005, according to the National Association of Realtors. However, there are areas that are experiencing a much higher percentage decline during the same time period, including ours. From March of last year to March of this year, the median price of an existing single-family home in the Sarasota-Bradenton-Venice area fell by 12.4 percent, also according to the National Association of Realtors. An interesting number since it falls almost dead center between both the leading economists’ opinions.

There is one segment of homeowners that either don’t believe there’s a slump or a bust or don’t care. According to a Coldwell Banker Previews International Luxury Survey, more than half of affluent homeowners expect their property value to appreciate somewhat during the next year. A tenth of the over 300 homeowners surveyed with properties worth in excess of a million dollars expect significant gains. Thirty-six percent of the affluent expect the price of their homes to increase significantly over the next five years, and 58 percent expect at least some gain, the survey goes on to say. In addition, 40 percent polled say they may buy a second home this year, confirming that the best time to buy real estate is in a down market. All I can say is if the very rich are bullish on real estate, who am I not to be?

Slump, bust, bull bear – call it what you like – financial markets have always had ups and downs. If what we’re experiencing now after five years of unprecedented growth is the most severe it gets, then get me a red cape. I’m running with the bulls.

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