San Francisco: Housing — just cool or going cold?
San Francisco Chronicle – This spring, Bay Area homeowners are likely to know whether the housing market has merely paused before resuming its upward climb or has truly downshifted to the slow lane and, if so, how dramatically.
Last month, the number of homes sold declined for the 10th month in a row and hit its lowest level since 2001, and price gains slowed markedly as well.
Now, the question is, will the market simply cool or will it dive into negative territory?
Each housing cycle in the past has had its own set of twists and turns in which a multitude of factors comes in to play.
As the current housing frenzy exhausts itself, variables ranging from interest rates and employment growth to affordability, new home supply and sellers’ willingness to part with their No. 1 asset will help determine the swiftness and magnitude of any downshift.
“Making this cycle more unique … is that there’s been a big increase in homeownership since the early 1990s,” said Celia Chen, director of housing economics at Moody’s Economy.com. “We’ve brought a lot more people into the market, and it’s uncertain how these people will react in a down cycle.”
The Bay Area real estate market typically runs in cycles, forming almost a stair step pattern of multiyear price increases followed by periods of stagnation or even mild declines.
So far, 2006 is off to a slow start, with fewer houses and condos changing hands than in the past five years. But, historically, January and February don’t offer strong data for predicting trends. By spring and summer — typically the strongest buying seasons — it should be clear whether this winter’s pronounced sales slowdown is here to stay or not and whether it will spread to prices.
At the end of the last two major housing booms in the early 1980s and 1990s, prices in most areas did not collapse.
Even amid job losses, soaring interest rates and worsening affordability, the region’s huge price gains of the late 1970s were followed in the early 1980s by relatively small declines before resuming their upward trajectory.
The next cycle saw a more striking correction. The median Bay Area home price crested at $225,000 in January 1990, then dipped as low as $205,000 — almost 9 percent — before climbing to $229,000 in the middle of May 1996, according to DataQuick, which releases a monthly report based on county recorder data on new sales. The drop was steeper when adjusted for inflation over the years of the downturn.
“On the coasts, you see price run-ups, and then instead of having large price declines, you have mild declines and flattening for a period — it’s what you’d call a stylized fact of the industry,” said Andrew Leventis, economist at the Office of Federal Housing Enterprise Oversight, the overseer of mortgage titans Fannie Mae and Freddie Mac.
The question is: “Where are we in the cycle?” It’s not entirely clear, but most observers think we are closer to the end of a booming cycle than the beginning.