More Q&A: Myth Versus Reality About
Today’s Housing Market

Q: In today’s housing environment, isn’t the smart move to keep waiting for prices to fall even further before venturing into the housing market?

A: The current housing price correction is helping to restore affordability. In parts of the country where the housing boom was not as strong, price declines have been marginal, and there have even been some exceptional areas where prices have remained on the rise. The bottom line for most existing home owners is that their homes will be worth significantly more than they paid for them once the market begins to recover – a process that is expected to begin in 2008. The repercussion for prospective buyers is that the market has provided some breathing room from the sky-high prices prevailing a year or two ago.

Q: Will housing drag the rest of the economy into a recession?

A: In a sharp departure from previous housing downturns, which coincided with economic recession, today’s economy has been performing relatively well, generating jobs and increasing household income. Most Americans have reasonably good expectations that the economy will remain on their side for some time to come. NAHB is currently forecasting that Gross Domestic Product growth will register a 2.4 percent annual rate during the third quarter.

Another key economic indicator is interest rates, which remain highly favorable for home buying. Interest rates are typically at their highest point at the outset of a recession, and follow a downward path as the Federal Reserve eases its monetary policies to get the economy growing again. While nobody can predict the course of interest rates, with the U.S. economy continuing to grow, the Fed in all likelihood will not be slashing interest rates as housing returns to full health. Prospective buyers who are waiting for dramatically lower interest rates from those that exist today will probably be disappointed. And with rates as low as they are now, whether they realize it or not, home buyers are already looking at a good thing.

Q: It seems that home prices will just keep going lower and never recover. What’s to stop this from happening?

A: It is a virtual given that over time home values will stabilize and then edge upward with the next recovery. To argue that home values will continue to decline and will never recover, somebody has to make a convincing argument that it will cost less to build a new home five years from now than it does today. That’s not going to happen.

Despite today’s housing slowdown, the price of bricks, mortar, lumber, copper and other products used in home building continues to go up due to worldwide demand and upward pressure on commodity prices generally. Look at anticipated population and household growth; consider the increasing scarcity of available land in metro markets where jobs are located and where people want to live. The cost of getting land entitled will continue to go up because of more and more restrictions and fees are being added by local governments. As inventories wind down, demand will rise and so will prices. Over time, all these factors will help drive up the cost of housing.

Questions answered by Matt Moroney, Executive Director of the Metropolitan Builders Association.