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Thursday, November 23, 2006

'Turnaround Hinges on Pricing'



Turnaround hinges on pricing

Today’s home sales slide is something of an anomaly, since past housing downturns have been fueled by big hikes in mortgage rates and economic slowdowns. We have neither of those today; what we have instead are nervous consumers. Home values got high, affordability deteriorated, and buyers lost confidence.

Once property prices come down to more suitable levels, households and investors should get back into the real estate game.

That might not be too much longer.

Price growth (year over year) turned negative in the West and Northeast in July, and nationally in August. With luck, eased price increases will continue for the balance of 2006. If they do, we might find that the decline in sales bottomed out in July.

That makes prices key. Sellers need to abandon unreasonable expectations about the value of their home. After all, most home owners have enjoyed substantial equity gains on their property during the real estate boom years. Cutting prices by 5 percent or 10 percent won’t wipe out those gains.

Those of us involved in the real estate profession find ourselves in the unlikely position of favoring price softening. Practitioners are asking, or pleading with, sellers to accept market realities and reduce their listing price.

The housing sector and the U.S. economy need home-sale transactions more than home-price appreciation. Every time a home is purchased, other industries, such as furniture and appliance makers, are positively impacted. Economists call this the “multiplier” effect. You purchase a home; you then need to purchase furniture, appliances, and so on.

In fact, a healthy housing market impacts about 20 percent of the U.S. gross domestic product.

Any short-term pain from slower home-price appreciation will be more than offset by sales gains. Once sales pick up, housing inventories drop. That places welcome upward pressure on home prices once again. And the cycle of life in the real estate markets as we know it continues.

Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.
This article was published on: 11/01/2006


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