Tuesday, May 23, 2006

Lereah's Interview with Business Week

From David Lereah's Interview with Bussiness Week:



In a picture posted on the National Association of Realtors' Web site, David Lereah appears trimly dressed, with light glowing behind him. The industry group's chief economist, author of Are You Missing the Real Estate Boom? (Doubleday, Random House), published in February, 2005, has been talking up the housing market for years.

Now he says the housing market is just taking a breather. "We're going to drop significantly, but it's not a balloon bursting," Lereah says. "This is a soft landing for the housing markets." He expects total home sales to drop to 6.62 million in 2006, from 7.07 million in 2005. Meanwhile, he thinks prices will continue appreciating this year, but only by around 5%, compared with 12.5% during 2005.

Why? Lereah says the growing economy will boost the market, offsetting the negative impact of rising interest rates. If you agree with his mantra, you'll say the Federal Reserve is the housing market's friend. BusinessWeek Online reporter Sonja Ryst recently asked the economist to explain his outlook. Edited excerpts from their conversation follow.

Why do you think prices will continue rising?

The economy is growing and there are job gains, so consumers have the financial wherewithal to purchase homes. Sure, the rise in rates has been inhibiting buying recently. A lot of the boom markets that boomed over the last several years are cooling off and home sales are dropping. But if the economy were in a recession, this would be worse. And mortgage rates aren't rising too high -- they're only going up to 7% by the end of the year.

What supports the housing markets are income gains, job creation, consumer confidence, and mortgage rates. We have all of the above still supporting us. Meanwhile, the demographic trends are wonderful. You have boomers buying homes and retirees living longer. The boomer children are now first-time home buyers. Everything still points to strong demand for home buying.

Are you worried about the drop in non-owner-occupied real estate values in certain cities, such as San Diego?

That's not going to spread. The health of a local economy tells us whether a real estate market is in good shape or bad shape, and most of those are very healthy. If you go to Miami, Washington, Chicago, or Los Angeles, those are healthy economies, and they're not going to be affected by what happens in San Diego. And prices are too high in San Diego because it's not an affordable city. The economy there isn't thriving, so it's hard to keep up there right now.

Do you think banks have been lending too aggressively?

The last two years of the boom were exaggerated because of lending. There were more loans, such as negative amortization loans, allowing people to put off their debt payments until later. In some metropolitan areas, this exaggerated home prices and increased them further than they should have gone.

To that extent, there's some risk in those local markets. For example, if you take any local market in California, they'll have interest-only loans and adjustable-rate mortgages because prices got too high. If mortgage rates increase, then some of those markets are vulnerable. But the forecast isn't for interest rates to go up significantly. I have mortgage rates going to 7%, not to 10%.

Before 2004, the banks weren't doing those types of loans -- I mean they didn't do them in any meaningful way. After 2004, places like California got too high in price and people couldn't afford homes anymore. That's why they started stretching the credit at that point and offering people lower downpayments, so people would take the homes at those prices.

Why do you think mortgage rates will go to 7%?

I don't see the Fed taking rates up higher. They have to worry about the housing markets and the economy slowing too much. Even though there's a little pressure on them from inflation, it's still under control. With the exception of oil, I don't see a scenario where rates can go higher.... But if the price of oil goes up from where it is today, it's a risk for every sector of the economy, not just housing.

Do you think the housing market could ever crash?

I'm getting tired of all these doomsayers. We live in houses, and our houses are not going to crash. This isn't the stock market.... Local economies are relatively healthy. There's job creation -- this isn't a scenario where bubbles burst. Can there be one or two or three or several local markets where prices actually go down? Yes. But to generalize for 30 markets or the whole real estate marketplace -- that's absurd.

1 Comments:

At 6:35 PM, Blogger James Baker said...

Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my site:
loans center
It covers loans center related subjects.
Have a great day!

 

Post a Comment

<< Home