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Where will cooling housing market end up?

Statistical and anecdotal evidence of a cooling of the national housing market abounds, but the next few months will be critical to determine whether the once-sizzling market will keep growing, plateau, or regress.
Construction worker Hector Reynoso carries a wood frame at a construction site in Las Vegas on April 17.Jae C. Hong / AP
/ Source: The Associated Press

Al Fernandez moved from Tampa to Miami two years ago, and acquaintances kept telling him to take advantage of the booming housing market before prices became too high.

But he held off until recently, uneasy about a “frenzy” in the market, where prices were rising too quickly. He decided to temporarily rent an apartment until the market cooled and he could research his purchase — likely a condo in the $400,000 range.

“It was just so crazy, the housing market then. People were saying, ‘Get in on this condo because in three months it’s going to go up $100,000,”’ Fernandez said.

“I’ve been looking for the last year. I really wanted to take my time. I wanted the ability not to be stressed out and rushed into anything.”

Fernandez is becoming a buyer while the market slows down, a trend reflected by Freddie Mac’s prediction that total home sales this year will be down by about 7 percent from 2005’s record levels. Many experts believe that the market will level off but remain steady, reaching what the National Association of Realtors calls a “high plateau” as speculators leave the market and interest rates remain reasonable for buyers.

Statistically, the leveling off of the housing market is apparent. Sales of existing homes rose in February by 5.2 percent from the previous month, but that came after five months of decline and was still 0.3 percent below a year ago, according to the realtor’s association’s most recent figures.

In new home sales, the U.S. Commerce Department reported construction dropped by 7.8 percent in March, the fourth decline in the past six months.

The national median existing home price for all housing types was $209,000 in February, up 10.6 percent from $189,000 in February 2005, but down from a high of $220,000 in August, the realtors’ association reported.

Cooling conditions
In a conference call announcing first quarter earnings, Lennar Corp. president and chief executive Stuart Miller acknowledged the Miami-based homebuilder had seen some softening in the new home market in pockets of the West, including Tucson, Ariz., but had seen steady sales in Florida and the Carolinas.

“Even the currently cooling housing conditions will give us an opportunity to perform well into 2007,” Miller said. “We’ve already seen some recovery in the traffic patterns in our major markets.”

Dave Denslow, a University of Florida economist, said data from the spring and summer months will likely give a better estimation of the housing market, but said he doubts that the much-discussed “housing bubble” will burst.

“People traditionally move in the spring and summer,” Denslow said. “The market is simply thinner in the winter ... If in the spring, if you see data with housing still selling slowly, then you can say (the boom) is over.”

Some observers point out several unknowns, such as a possible rise in interest rates, which would offset other factors that would help builders in places such as Florida, where hundreds of thousand of people move each year. Freddie Mac, the mortgage company, reported that rates on 30-year, fixed-rate mortgages averaged 6.49 percent for the week ending April 13. That was up from 6.43 percent last week and the highest since mid-July of 2002.

“Demand will weaken despite the demographics if interest rates go up enough,” Denslow said.

Albert Saiz, an assistant real estate professor at the University of Pennsylvania, said that prospective buyers could think twice should interest rates rise. He also noted that the influence of speculators “flipping” homes for a quick profit may be declining, as they leave the market because of the perceived slowdown and fear over interest rates.

“I do have a sense that speculators are very, very mindful of the general economic situation, and they may actually be contributing somewhat to that sort of deceleration in the market,” Saiz said.

“It’s the best thing that could happen to us because we were competing with the lunatic fringe,” said Brian Street of Boca Developers, a luxury condo builder. “We would like to compete with the rationale of the marketplace, not the frenzy of the marketplace.”

Rising construction costs
Another potential problem is the rising cost of necessary construction materials such as concrete and steel, and a lack of labor to work on homes. Some Miami-area contractors have lamented that what once cost $90 per square foot to build now costs $130, and the pool of project superintendents is lacking and expensive. A higher cost of building homes and condos means higher prices for buyers.

Charles Kibert, a construction professor at the University of Florida, says nations such as China have such a demand for concrete and steel that it’s taking supplies from American builders and making materials more expensive and less accessible. Damage from the past two active hurricane seasons also have drained supplies, and Kibert pointed out that the reconstruction of New Orleans will require massive amounts of building materials.

And then there’s a shortage of workers, a major problem for builders.

“It’s hard for them to find not only enough people, but competent people,” Kibert said. “Companies are having a hard time shifting gears to cope with the twin horns of this dilemma.”

When analyzing the housing market, it’s hard to ignore Florida, one of the hottest areas in terms of demand and growing supply.

Last year, Florida saw the second-highest percent increase in house prices at 26.83 percent, behind only Arizona (34.9 percent) and way ahead of the national average of 12.95 percent, according to the Office of Federal Housing Enterprise Oversight.

Florida’s weather, relatively cheap land, lack of a state income tax and its scenic coasts are attractive to buyers.

Mike Hughes, vice president of Downing-Frye Realty in Naples, said those factors led the agency to a record year of about $3.2 billion in sales in southwest Florida last year.

But this year’s projections are near $2 billion, still a healthy number, but clearly not as lucrative as 2005. He says the smart buyers are taking a more cautious approach.

“I see a number of buyers I feel will still buy this year,” Hughes said. “They’re kind of waiting to see. It could work against them if interest rates go up.”