Housing Market 2008 Outlook - It's a Bust

In October, I reported that a 10% decline in housing market prices constituted a bust. (See How Bad is the Current Housing Market Decline?). This was based on research that showed declines of 10-15% are enough to eliminate equity, creating a snowball effect that inflicts severe pain for homeowners. (Source: International Herald Tribune, "When Does a Housing Slump Becomes a Bust?", June 17, 2007)

The latest outlook from the National Association of Realtors shows that, by the end of this quarter, single-family home resale median prices will have declined 10% from their peak of $223,000 one year ago. (Source: NAR, U.S. Economic Outlook, January 2008)

Furthermore, resale single-family home sales will decline to a 4.9 million rate in Q1 2008, down 23% from a year ago. If price declines follow sales declines, it would compare to the 24% decline experienced during the Great Depression of 1929. It would also be similar to the 22-40% decline in Texas and other oil-producing states during the oil-price drop in the early 1980's.

Home prices probably won't fall as far, however, since most homeowners will take their homes off the market before selling at such a loss. Furthermore, mortgage rates are around 6%, only half the rate they were in the '80's. The Fed has promised to further lower rates, keeping needed liquidity in the mortgage market. This will allow mortgage holders to refinance, reducing foreclosures.

What It Means to You

Real estate contributes 10% to the economy, so GDP will suffer. In fact, NAR forecasts a negative growth rate for Q4 2007. Watch for the advance GDP Report, due January 30th. The housing bust has already caused a stock market correction. If the housing bust continues into the late spring, the correction could turn into a bear market, and the economy could suffer a recession.

More on Real Estate and the Economy

• How Does Real Estate Affect the U.S. Economy?
• Definitions of Commonly Used Real Estate Terms
• A Primer on Interest Rates

If you are selling your home, here are some great tips from the About.com guide to Homes, Elizabeth Weintraub.

• Selling in a Falling Market
• Avoid Mistakes When Selling in a Slow Market
• When Is the Time Right to Reduce Price?