Urban Land Institute Speech
Greg Rothman served on a panel at the October 24, 2006, Urban Land Institute (ULI) regional conference on land use. The panel was led by Peter Korpacz and Greg spoke on emerging trends in the Central Pennsylvania residential market.
Urban Land Institute: Emerging Trends October 24, 2006
First of all – as a caveat – I am an optimist. If I were falling out of a 20 story building and you asked me on floor ten how I’d be doing, I’d say “so far, so good.” How else do you succeed in real estate? My firm has decided not to participate in the housing bubble bust.
But, I have a news flash for you… based on the number of transactions (7,249) and volume – if the sales currently listed as pending close by the end of the year – likely since there are 67 days left – we will end up in 2006 with the SECOND Best year all time for number of transactions. The same goes nationally.
Look below: 2006 will be the BEST year ever for Average Sale Price and Total Volume.
Year # Of Sales Days Avg. Price Appr. Volume
2000 6,631 89 $123,661 1.0% $820 Mil
2001 7,189 86 $126,294 2.2% $908 Mil
2002 7,265 78 $132,382 4.8% $962 Mil
2003 7,565 59 $142,610 7.7% $1.08 Bil
2004 8,468 51 $156,158 9.5% $1.32 Bil
2005 8,751 47 $169,840 8.8% $1.49 Bil
Q3 2006 7,249* 47 $176,372 5.1% $1.52 Bil
Pending transactions equals 1,351 for a total of 8,600 sales.
2006 Looking Back
Certain segments of the residential market began slowing down at the end of 2005 and the beginning of 2006. However, in Central Pennsylvania and the Harrisburg Market, 2006 has been a steady year. The extraordinary appreciation and quick wind-falls are gone. National builders are pulling back. Higher priced homes are sitting longer. Those who don’t have to buy – are putting on additions and staying put keeping their 5% interest rates in place and getting home equity seconds to pay for the addition.
Empty-Nester Downsizing: Sell the family home of 20+ years and purchase or build a new home – with less space – more efficient (new kitchen, large masterbedroom) for more than the old homested.
2007 Looking Forward
Beginning in January, the Federal Reserve will begin lowering rates again.
The rest of the industry will reassessing the severity of the unfolding downturn. Some are predicting housing price declines of up to 20% and a common perception is that we are in for a multi-year correction. But not necessarily in Central PA.
Those effects include the impact on the job market, on consumer spending via the housing wealth effect, on lending institutions, and on the global financial system as mortgage credit quality weakens.
The unwinding of the long housing boom began in the summer of 2005, when interest rates began to creep up. While the long-term interest rates that govern the costs of fixed-rate mortgages have risen modestly, short-term rates and adjustable mortgage rates have risen substantially more.
The housing downturn has become more dramatic with the departure from the market of the "flipper," the so-called buyers who intend to re-sell their properties quickly at a profit in an environment of rising prices.
David Lereah, NAR’s chief economist, said the housing market is showing signs of life and that sales may be leveling out. “Many potential home buyers who have been taking a wait-and-see attitude or taking their time and being methodical in the search process are being enticed by lower home prices,” he said. “Given a positive economic backdrop of lower interest rates and job creation, we expect sales activity to pick up early next year.”
Existing-home sales are forecast to be fairly stable in the fourth quarter and sales for all of 2006 are expected to drop 8.9 percent to 6.45 million – still the third strongest year after consecutive records in 2004 and 2005. New-home sales are forecast to fall 17.3 percent this year to 1.06 million, the fourth highest year on record. Housing starts should be down 10.9
The 30-year fixed-rate mortgage will probably average 6.5 percent in the fourth quarter but will trend up modestly in 2007.
The unemployment rate should average 4.8 percent in the fourth quarter. Inflation, as measured by the Consumer Price Index, is expected to be 3.4 percent for all of 2006, while growth in the U.S. gross domestic product is forecast at 3.3 percent. Inflation-adjusted disposable personal income is likely to grow 3.4 percent for 2006.
Many of the reasons for today’s real estate slide are obvious: home values got too high, affordability deteriorated and the homebuying public lost confidence. Households and investors are now sitting comfortably and patiently on the sidelines waiting to get back into the real estate game, but only when property prices come down to more suitable levels. The good news is that prices are beginning to soften. Price growth (year over year) turned negative in the West and Northeast regions of the nation during July. Hopefully, this trend can continue for the next several months. With price reductions come gains in home sales. If prices continue to fall, the decline in sales might have bottomed out in July.
LAND to HOUSE RATIO’s have jumped to 30%-35%. In Bethany Beach the land costs $4,000,000 and the improvements $1,000,000 – or 4 to 1. Historically, single family houses were 20-25%, and townhouses 15-20%. We have been seeing 30% for townhouses and 35% for single family lots. Most new sales are package deals, so determining the land prices is sometimes tricky.
2006 is going to be down from last year… the bubble has burst, the boom has busted…and 2006 will be the second best year of all time for number of units sold and total volume and number one in Central PA for average sale price and a chance to be the best year ever for volume.
If you are driving 100 miles an hour and you slow down to 75 – that is a 25% reduction in speed, but you are still going over the speed limit.
Interest rates began climbing in the summer of 2005 – but have started leveling off and even declining in the last few months. Rates will drop below six percent again by mid-January.
GREG’s Predictions:
We will still see 6% to 8% appreciation in residential real estate on resale. Builders will drop profit margins from 18% back to 12%.
Yogi Berra quote “Nobody goes there any more, it’s too crowded.” Record percent of homeowners in Central PA and nationally.
posted by Greg Rothman @ 5:01 PM
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