Sometimes all the talk in the world leads us nowhere. Then, a statement of simple common sense reveals all. From Barry Ritholtz, Ritholtz Analytics, commenting in his blog, “The Big Picture”, Friday, December 29, 2006:

I was chatting with the CEO of Coldwell Banker Real Estate in the green room of Kudlow this week. In addition to pointing out this remains the 3rd best year on record, he revealed a lot of common sense with this statement (I am paraphrasing): “Price your house at a reasonable level and it will sell quickly. Overprice it, or assume it’s still 2005, and it won’t move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it.”

More conflicting data; some good news, some not-so-good. From the AP:

By MARTIN CRUTSINGER, AP Economics Writer 2 hours, 51 minutes ago WASHINGTON - Sales of existing homes managed to eke out a small increase in November but the price of homes sold fell for a record fourth consecutive month, a real estate trade group reported Thursday.

The National Association of Realtors reported that sales of previously owned homes rose 0.6 percent in November to a seasonally adjusted annual rate of 6.28 million units. That followed a 0.5 percent sales increase in October and marked the first back-to-back sales gains since the spring of 2005.

The slight increases in sales were not enough to halt a slide in home prices. The median price for an existing home sold in November dropped to $218,000, down 3.1 percent from the price a year ago. It was the first time on record that sales prices compared to a year ago have fallen for four straight months.

The report on existing home sales offered further hope that the serious slump in housing that has occurred this year may be bottoming out. It followed a report Wednesday that showed that new home sales rose 3.4 percent in November, the third gain in the past four months.

David Lereah, chief economist for the Realtors, said he believed that September’s sales activity may represent the low point for sales this cycle but he cautioned that home prices would probably continue declining for a few more months. By region of the country, sales were down 1.6 percent in the South and they were unchanged in the Midwest. However, the Northeast posted a strong 6 percent sales gain and the West saw sales rise by 0.8 percent.

The housing industry has been in a severe slump this year after posting five consecutive years of record sales of both new and existing homes. Lereah said he believed sales of existing homes would fall by 9 percent this year and post a smaller drop of 1 percent in 2007 as the markets undergo a correction following what many economists believe was a real estate speculative bubble.

“We’ve entered a more sustainable period of home sales now and we expect greater support for prices over time as inventory levels are eventually drawn down,” Lereah said. He predicted price declines would continue in December and probably for the early part of 2007. He said these were necessary adjustments that were luring buyers back into the market.

From The Associated Press:
Wednesday December 27, 10:14 AM EST

WASHINGTON (AP) — Sales of new homes rose in November while the backlog of unsold homes fell for a fourth straight month, providing hope that the serious slump in housing could be ending.

Sales of new single-family homes rose by 3.4 percent last month to a seasonally adjusted annual rate of 1.047 million units, reflecting solid sales increases in every region of the country except the South.

The increase was better than had been expected and offered hope that the steep slide in housing may be starting to bottom out as builders, using a wide array of incentives, begin to make a dent in the record level of unsold homes.

The 3.4 percent rebound in sales last month was the third increase in the past four months. It helped to lift the median price for a new home to $251,700, an increase of 3.2 percent from a year ago. The median price is the point where half the homes sold for more and half for less.

The housing industry has undergone a severe slowdown this year following a prolonged boom that had been fueled by the lowest mortgage rates in more than four decades.

This year’s slump followed five years in which sales of both new and existing homes had set records.

What some are calling a recession in housing has been a big factor in the economy’s overall slowdown, cutting 1.2 percentage points from growth in the July-September quarter, a period when the economy expanded at a lackluster pace of just 2 percent.

Many analysts believe housing is continuing to act as a drag on growth in the current quarter and will continue to depress activity through the early part of 2007.

The number of unsold homes fell by 1.4 percent in November to 545,000. It was the fourth straight decline in inventories after they had hit an all-time high of 573,000 units in July. Builders have been cutting prices and offering various incentives such as helping to cover closing costs in an effort to move finished homes and reduce high cancellation rates.

It would take 6.3 months to exhaust the current supply of homes at the November sales pace, down from 6.7 months in October and 7.2 months in July.

Sales last month increased in all parts of the country except the South, where they fell by 9.3 percent. Sales were up 22.5 percent in the Northeast, a rebound from a huge 35.5 percent drop in October. Sales rose by 22.4 percent in the Midwest and 19 percent in the West.

The following letter, from Dr. Julie Ann Juliano in Branchburg, tells the whole story. Please call me at (908) 334-2329 or chip.hughes@att.net if you would like more info, want to volunteer or wish to make a donation:

You are in a major auto accident and rushed to the hospital. You are having surgery. You are elderly and severely anemic, you have a blood cancer or are undergoing chemotherapy. Or…you need a blood transfusion, platelet transfusion, or plasma transfusion. You never think to worry about it; the blood and blood products will be there when you need them…or will they? The pool of available blood donors grows smaller each day. To keep the blood supply safe, fewer and fewer people are eligible to give. Those that do give can only give once every 6 weeks. What if you need blood, and it is not there?

Blood donation and blood banking are a very vital part of medical care. It is not something we often think about, but when you need it, you don’t want to hear that the blood “will be here in a few hours” after it is driven from another location. When you or your family member need a transfusion, you don’t want to wait or hear that there is a shortage. Until now, Somerset Medical Center has been able to keep up with the blood supply needs of its patients. With the addition of the new Cancer Center, the need for blood and blood products will greatly increase. The question is how to best do this.

The Rotary Club of Branchburg has taken a long look at this subject along with the blood bank at the hospital. The best answer is called a TRIMA Accel Collection System machine. This machine will allow the specific donation of red cells, platelets or plasma. This will allow for donors to give far more often and will keep the blood supply flowing at the hospital. The Rotary is always looking for local and international projects to help the community. In the past we built the playground in White Oak Park, and last year we constructed the Challenger Baseball Field next to Old York School. This year we are looking to serve the larger community of Somerset County with the purchase of this vital machine.

While the hospital is building its new facilities it is not financially able to upgrade in some areas, although it would greatly benefit the hospital and the patients. That is where Rotary comes in- helping in the community – for the good of all concerned. The cost of this machine is $85,000. We are appealing to the general community to help us in our fundraising efforts to purchase this machine for the hospital, for the common good.

Blood is life. Blood is lifesaving. Healthy blood is hard to find, and the demand keeps growing. Help us to help you. Help us to keep the supply safe and abundant at our local hospital. Your support has always been appreciated in the past, and we are looking to you again. Together we can, and do, make a difference.

Sincerely,

Julie Ann S. Juliano, MD

High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back.

The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.

First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for first-time buyers to buy homes in many parts of the country, an important factor in the recent housing downturn.

But as more sellers begin to cut their asking prices and rates on fixed-rate mortgages have moved lower, some real-estate agents are reporting renewed interest from people shopping for their first home. Sam Schneiderman, broker-owner of the Greater Boston Home Team, says he has seen “a real surge in first-time buyer activity” in the last two to three weeks as lower prices draw buyers who think the market may be close to bottoming out. Kevin Freadhoff, an agent with Realty Executives of Southern Arizona in Tucson, says in the past 60 days he is seeing first-time buyers “start to warm back up again. They are seeing that houses have become more affordable.”

In Madison, Wis., rising interest rates and home prices knocked many first-time buyers out of the market early in the year, says Phil Sveum, broker-owner of Coldwell Banker Sveum Realtors. But in the past month, Mr. Sveum has seen an increase in tenants looking to buy their first home. The recent drop in interest rates “has created some momentum for first-time buyers, not to write an offer today, but to start looking again and be serious about moving in January or February,” he says.

First-time buyers are particularly sensitive to rising housing costs, in part because they don’t have equity from an existing home they can tap as prices shoot higher. And lower incomes provide less of a cushion when monthly payments climb. In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent National Association of Realtors survey, up from 43% a year earlier.

But recent data have been encouraging for first-time buyers. The National Association of Realtors reported that the median price of an existing home fell 3.5% in October from a year earlier, the largest decline since the group began collecting these data in the late 1960s. The average rate on a 30-year fixed-rate mortgage now stands at 6.16%, the lowest level since October 2005, according to HSH Associates in Pompton Plains, N.J.

A growing number of first-time buyers in Florida’s Tampa Bay area are taking advantage of special deals from builders looking to unload newly constructed homes that are bloating their inventories, says Craig Beggins, president of Century 21 Beggins Enterprises.

Jason Colon, a bank analyst, bought a new three-bedroom, 2½-bath townhouse in Apollo Beach, Fla., last month after looking for his first home for roughly a year. Mr. Colon paid $163,000 for the property, which was originally priced at $242,000. The builder also picked up $5,000 of his closing costs. “It was crazy for me not to jump on it because it was brand-new and I’m buying the model unit, which has all the upgrades,” says Mr. Colon. Falling interest rates have made the purchase more affordable, he adds.

Yet affordability remains a problem for many would-be buyers. In the second quarter, buyers had to stretch more than ever before in 25 of the top 50 markets, according to Bank of America analyst Daniel Oppenheim. Even with the recent price declines, he estimates that it would take a further 7% fall in home prices, combined with a 4% annual increase in nominal incomes, to bring affordability back in line with average levels over the past decade by 2008 — if interest rates remain stable.

In recent years, many first-time buyers had been able to stretch their dollars by taking out adjustable-rate mortgages and so-called affordability mortgages, which allowed them to lower their monthly payments or buy a home with little, if any, down payment. But as short-term interest rates have climbed higher, the benefits of adjustables have declined.

At the same time, some first-time buyers have become more cautious. Sheila Doyle, an agent with Baird & Warner in Glenview, Ill., says that more of the first-time buyers she works with are getting their parents to help them with a down payment and fewer are financing 90% or 100% of the purchase price. “I don’t see them doing the crazy financing that was so frequent last year,” she says.

New guidelines for nontraditional mortgages, recently issued by federal banking regulators, could make it tougher for some first-time buyers to use these products. Some lenders are also beginning to tighten their standards as mortgage delinquencies rise.

Many would-be buyers are taking a wait-and-see approach. When home prices were soaring, many first-time buyers jumped to buy houses they could barely afford, believing they would be shut out of the market if they didn’t act quickly. Now, with prices falling in many areas, “there’s no immediate need to buy, and so they kick the tires more,” says Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va.

Arthur Orkisz, a speechwriter in the Washington, D.C., area, says he expects to hold off until at least next summer before buying his first home, “unless something so dramatic happens that it’s absolutely silly to pass it up.” Giveaways such as flat-screen TVs are “all nice and dandy, but at the end of the day anyone capable of doing the arithmetic realizes that’s a gimmick to get me in the door,” he says. “That’s not enough of an incentive” to buy.

Scott Steiner, managing broker of Help-U-Sell Lakeview Realty in Lake Elsinore, Calif., says he’s getting fewer calls and doing fewer showings for the properties he’s listing. But fliers describing the properties are being snapped up faster than ever before — a sign, he says, that many first-time buyers are taking their time and waiting for the market to stabilize before making a move.

In much of the country, renting remains a bargain compared with owning, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. In markets such as Las Vegas, San Diego and Washington, the monthly cost of renting the average apartment is roughly half what it would cost to own the median-price home in the third quarter. “Renting is only marginally less of a bargain” even with the latest decreases in home prices, says Torto Wheaton senior economist Gleb Nechayev.

From Forbes:

Yes, But Bet The House

By a margin of almost 2-to-1, economists surveyed by WSJ.com last month judged that the worst of the residential real estate slump was history. House prices will soften in 2007, the sages predicted, but by only a little bit. In fact, 20 of the 49 respondents forecast a rise.

Ebenezer Scrooge was a mortgage banker, and the arguments I am about to marshal for a hard landing in housing might sound un-Christmaslike. But during the just-pricked bubble, it wasn’t the Scrooges and the Marleys who lent more than 100% of the purchase price of a house without bothering to verify the income or employment of the applicant, or even to insist that he or she pay down a little bit of the principal now and then. House prices soared on the wings of the modern, optimistic, growth-obsessed mortgage industry.

All can agree that the housing data are grim enough today. From their recent respective peaks, single-family home sales are down by 15%, single-family housing starts by 35% and single-family home prices by 3.5%. The question is whether the stock market and the famously resilient U.S. economy will continue to shrug off the bad news.
…
The fundamental problem, Gordon observes, is that the typical American home buyer can’t afford a home at today’s prices. “We Americans have tested the limits of affordability over the past five years,” he says. “Since the end of 2001, disposable personal income is up about 25% and mortgage rates are little changed. That argues for 25% higher home prices. Instead, home prices rose by an average of 50% and in many markets by 100% or more.” In fact, according to data compiled by Yale economist Robert Shiller, inflation-adjusted house prices in the past five years logged the second-fastest cumulative growth since the administration of William McKinley 110 years ago (the late 1940s hold the record for the fastest rise in real house prices over a half-decade).

Falling house prices in isolation would constitute no grave peril. A housing-induced downturn in job growth is what would cause a bear’s pulse to race. Gordon insists it’s coming, because the formerly potent stimulus of above-trend borrowing growth is about to be removed. Consider, he notes: “Americans pulled out nearly $500 billion of equity in their homes last year in order to buy other stuff. That number shot up from about $100 billion in 2001.” The source of this borrowing? Why, the 12%–or $2 trillion–bump-up in the appraised value of the 2005 U.S. housing stock, double the 2002 increase. Reduce or reverse this appreciation and you stymie the borrowing boom.
…
Already, despite a still low jobless rate, delinquencies, foreclosures and other signs of distress are surfacing in the subprime segment of the nonagency market. Even a mild business downturn could cause a revulsion against the kind of easy credit that put so many houses within financial reach (or seemed to).

The numbers:

January
Average Sales (2003-2005): 2000
2005 Sales: 2013
2006 Sales: 1705
(Down 15.3% Year Over Year)

February
Average Sales (2003-2005): 1583
2005 Sales: 1578
2006 Sales: 1395
(Down 11.6% Year Over Year)

March
Average Sales (2003-2005): 2193
2005 Sales: 2256
2006 Sales: 2033
(Down 9.9% Year Over Year)

April
Average Sales (2003-2005): 2322
2005 Sales: 2383
2006 Sales: 1817
(Down 23.8% Year Over Year)

May
Average Sales (2003-2005): 2615
2005 Sales: 2725
2006 Sales: 2298
(Down 15.7% Year Over Year)

June
Average Sales (2003-2005): 3486
2005 Sales: 3682
2006 Sales: 2911
(Down 20.9% Year Over Year)

July
Average Sales (2003-2005): 3495
2005 Sales: 3338
2006 Sales: 2428
(Down 27.3% Year Over Year)

August
Average Sales (2003-2005): 3661
2005 Sales: 3668
2006 Sales: 2599
(Down 29.1% Year Over Year)

September
Average Sales (2003-2005): 2854
2005 Sales: 2655
2006 Sales: 1968
(Down 25.9% Year Over Year)

October
Average Sales (2003-2005): 2570
2005 Sales: 2280
2006 Sales: 1867
(Down 18.1% Year Over Year)

November
Average Sales (2003-2005): 2330
2005 Sales: 2135
2006 Sales: 1858
(Down 13.0% Year Over Year)

There are so many crosscurrents in the market right now, it’s hard to get a good read on what the next move will be. On the one hand, inventory remains at high levels, sales velocity is down, prices have definitely come down and the local rate of withdrawn & expired listings is a gargantuan 35%. On the other hand, we still have virtually full employment, mortgage rates are low (and going lower) and the local inventory- while large- has not grown since July. And, a person far smarter than I, Alan Greenspan, has pronounced the worst of the realty downturn to be over (caveat: he’s speaking in broad, national terms…remember, all real estate is local).

From an anecdotal, unscientific standpoint, I’m seeing motivated sellers achieve sales when they’re positioning around 8-10% off 2005 market highs for detached, single-family housing. Unfortunately, the pain is greater for condos/townhomes: they are selling at closer to 17-20% off those ‘05 highs, and the inventory is still painfully swollen.

Right now, it appears as though the Spring market (roughly defined as the period of time between the week after the Super Bowl and Memorial Day) will tell the story for all of 2007. If many sellers who were part of the 35% expired/withdrawn set in 2006 re-enter (along with their hopes of inflated prices) during the Spring market, inventory can be expected to swell…and prices may drop further.

If, however, many frustrated sellers from 2006 decide to stay put, the market- and prices- could stabilize at current levels. Then, the story of 2007 will be one of working down inventory built during 2006. It’ll be a boring- but viable- market.

There are also two “wild cards” that need to be thrown into the mix: 1) NJ lis pendens (initial foreclosure paperwork) filings are up 44% over this time last year; and 2) mortgage rates may continue to fall in 2007, as the Fed could be forced to lower rates due to economic contraction. If even a fraction of the owners subject to foreclosure end up having to sell, it will have a major impact on inventory…and prices. However, if prevailing mortgage rates decline further, they may incentivize “fence-sitting” buyers to pull the trigger.

Which path does the market take? Who knows. There are two paths- pretty clearly defined- and compelling arguments for both.