My Afternoon with Dr. Lawrence Yun

An analysis of Real Estate Market Trends & Outlook

Are you proud to wear the Realtor® pin on your lapel each and every day? I am and yesterday I was proud to join hundreds of other Realtors® as we listened to Dr. Lawrence Yun, Chief Economist of the National Association of Realtors®, as he reflected on the housing market, the plans for economic recovery and our roles as ambassadors to the industry to "set the record straight."

The Crystal Ball

Dr Yun started the discussion with some information about why the homebuyers tax credit was extended and expanded in late November 2009. Although some 2 million home buyers could claim the credit to date, the intended stimulus to the housing market did not really take place until buyers thought that the tax credit may not be extended, so there was a surge of activity in the third and beginning of the fourth quarters of 2009, but this rapidly diminished in November when buyers realized that they could not close in sufficient time to take advantage of the credit which was (then) supposed to expire on November 30.

Because of this "shift" in the buying habits of homeowners, the Obama administration felt that the growth in the housing market would not be sustainable without further incentives to buy a home - not just first time homeowners, but for repeat buyers also. In fact, an additional 2.4 million homebuyers are expected to take advantage of the tax incentives before the June 30, 2010 (closing) cut-off date.

The cost of the tax credits is expected to cost the government around $30 billion dollars. If the government had not continued to stimulate the housing market, the impact because of continued downward pressure on home values, was estimated at some $730 billion dollars.

With the help of the tax incentives through the middle of the year, Dr. Yun predicts that existing home sales will get a 15% boost in 2010 and home prices will see a 3%-5% boost as prices continue to stabilize and the goal of the Obama Administration to preserve middle class wealth is attained.

The Reality

Dr Yun joked that he has never been permitted to meet with the President or his cabinet at the White House, saying that the "Secret Service protection is so significant...during the day." In fact, most of the discussions regarding government intervention in the housing market has been done with the notable absence of the Chief Economist of the NAR, the think tanks and other leaders in the industry.

What Dr. Yun sees is growing pent-up demand for housing. If these demands can be satisfied, then we will see normalization of the housing markets - in most geographical areas.

Currently, housing sales are at the same level as the year 2000. This is known as the "pre-housing boom" period. So our housing bubble grew over several years, until it burst suddenly in 2007/2008. Since 2000, we have added 5 million additional renters with qualifying income to buy a median priced home but are faced with a market that is bi-furcated in that homes priced above $500,000 are not selling, and homes priced under $100,000 are showing positive growth trends.

Why is this happening? Dr. Yun suggested the following:

• Banks need to start lending at favorable terms to the jumbo loan home buyer. As banks pay off their TARP funds and move back to profitability, they will be able to use their own money to make jumbo loans (jumbo loans are not "conforming" and therefore do not qualify for MBS securitization through FNMA or FHLMC.
• There is a housing shortage for new home construction. Markets like Boston and Greater Boston need to be more flexible with construction permitting in order to increase the number of new homes for buyers looking for new home construction
• Lenders need to ease up on financing for new construction
• Buyers need to be convinced to get off of the fence and understand that interest rates will likely rise (if the government continues to grow the national debt, interest rates have to increase), that home ownership is still a good investment, and that the economy actually appears to be improving (Dr Yun cited that America is producing more with fewer workers, but that payroll jobs are beginning to increase over non-payroll or temporary jobs in many geographical areas around the country - which is a sign of recovery.)

The Irony

We are a global economy. Pessimism breeds contempt. If more people hold out on buying a home, prices will continue to drop as inventories grow. Dr Yun's talk conveyed a very strong message that our leaders need to do something to help homeowners finance new homes with jumbo loans and to allow existing homeowners to refinance at favorable rates. It is also important for our State governments to focus on job creation, rather than to protect jobs, in order to further stimulate the economy.

However, everything we do is dependent upon the strength of the dollar. If foreign countries devalue the US Dollar, interest rates will rise rapidly to prevent the market from tumbling further into recession. Therefore, the housing recovery is also dependent upon the global markets' perception of our economy.

Our Role as Realtors®

Our job in 2010 is to get buyers off of the fence and into new homes. As banks turn back to profitability, the jumbo loan market should open up to attractive financing rates. Going hand-in-hand with market recovery, jobs will be created and more people will need to buy a home. New home inventories will also grow to satisfy the needs of home buyers. Interest rates will likely rise during 2010. Dr. Yun suggested that rates will be around 6% for conforming loans at the end of the year. Housing prices will stabilize if we continue to move the inventory and create new inventory. Helping our clients understand this and helping them to buy a home that they can afford, will lead to recovery.