In 2006, as novice investors who bought into the housing market at its peak watched in dismay, the housing market took the downturn that seasoned investors and industry experts had long been predicting.
In January, the National Association of Realtors (NAR) released a study comparing 2006 existing home sales to the previous two years. The study reveals dramatic changes compared to prior years: In 2006, national housing sales dropped and price increases slowed to a crawl.
The study’s focus on existing home sales is particularly useful because existing home sales make up approximately 85 percent of the market, according to the NAR. All existing home sales information is based on transactions that closed.
In contrast, new home sales are recorded when the contract to purchase is signed or when a deposit is accepted. This fails to show how many of those sales actually closed; some certainly cancelled but were recorded as sales anyway.
Publications citing new home sales trends as an indicator of general market trends may inadvertently present an unrealistically optimistic view by omitting cancellations. Since existing home sales make up a much larger market share and are based on closing data, those statistics more accurately reflect overall market trends.
The slowing trend evident from the 2006 statistics is likely to continue, say some key industry experts. David Berson, chief economist of mortgage-financing company Fannie Mae, predicted that although the biggest drops have already happened, home sales will fall further in 2007. He added that national home price appreciation is likely to move modestly negative in 2007.
Berson expects a 7.1 percent drop in 2007 new home sales and an 8.1 percent drop in existing home sales. The Mortgage Bankers Association predicted nearly identical numbers.
This is not all bad news for experienced investors. With inexperienced investors leaving the market, seasoned investors can take advantage of low prices and panicking sellers to find unusual deals. What’s more, experienced investors will no longer find themselves competing for properties with irrational and inflated bids made by rookies.
