Economy in Focus

Beneath Market Punditry, Underlying Strength
by Robert Freedman

With some 5 percent of subprime mortgage borrowers facing trouble and global investors wondering if prime mortgages remain a smart investment, these are indeed challenging times for real estate.

In one of the most unsettling headlines of all, Robert Shiller of Yale University and one of the developers of the widely tracked S&P Case-Shiller Home Price Indices, has said mortgage troubles are only beginning and that some home prices could fall 50 percent in the next few years.

Dire predictions like that do more than grab the attention of the media; they can shake consumer confidence and help make such predictions self-fulfilling as home buyers stay on the sidelines, pressuring sellers to lower prices—in effect fueling a downward spiral.

But the prognosis is considerably different than the scare scenario forecasters would have us believe, says Lawrence Yun, NAR vice president of research. In this interview with REALTOR® Magazine, Yun puts the state of the economy into perspective, explaining just how contained the subprime problem is and why the trend lines are already contradicting many of the predictions of woe.

REALTOR® Magazine:No doubt the general media tend to play up negative market news like continuing soft home sales. Is there truth in these market concerns?

Yun: It’s all a matter of perspective. Home sales do continue to be soft. We’re predicting existing-home sales to be down 7 percent year-over-year at the end of 2007, but that’s coming off a five-year boom. We’re forecasting a sales level near what we had in 2002, a very good year, and a level that’s far closer to normal than what we’ve been seeing over the past four years.

At the same time, price appreciation is holding up better than media reports would have us believe. In data we collected this fall, two-thirds of markets reported positive price growth in the third quarter, up from half of all markets in the second quarter. In markets where prices continue to be down, the declines are minimal, 1 percent to 2 percent. Only a very few markets are seeing declines higher than 5 percent.

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