Nationally there are still concerns over the shake out from problems in the credit market. Many market participants are hopeful the U.S. economy can sustain reasonably strong property fundamentals in 2008, and prevent lowered-returns and property values from turning into losses and red ink. Some development projects have been put on hold, helping control supply. But demand needs to overcome hits from the soft housing market and from consumers stretched by low savings rates, increasing mortgage payments, rising health care expenditures, and high energy costs. Over the next year, since debt will cost more and be available in lesser amounts, cash buyers will hold greater leverage. Many homebuilders and condo developers are now dealing with oversupplies and dropping prices, while the market fallout from rising residential delinquencies, defaults, and ultimately foreclosures appears to be just beginning. Lowered home values and higher mortgage rates have been also been raising refinancing hurdles. Home prices may drop further once motivated owners put their houses up for sale and foreclosure auctions increase. Some multifamily investors have benefited from the pool of new renters, shoring up occupancy and lease rates. Uncertainty and challenges characterize 2008, with greater downside risk than real estate markets have faced in close to two decades.
The greater Massachusetts market has shown some stability in the face of greater economic pressures throughout 2007. According to census data, the number of building permits for new homes in Massachusetts has plummeted by more than 30% since July 2005. While the median sales price of a Massachusetts single-family homes have been falling in most towns, some of the more affluent areas have seen stable pricing, and homes located in the premium submarkets continue to show strength. The overall volume of deals is actually up in many towns, which illustrates the stability in the housing market.
In 2008 those making real estate decisions need to get a fix on three related areas to navigate property market uncertainty: supply/demand fundamentals, capital flows, and, most importantly, the economy. All could be in a state of flux during the year.
Supply/demand fundamentals: All eyes focus on a potential slowdown on the demand side of the equation; will buyers continue to support the market? Over the next year it appears that prices and values have room to drop further as foreclosures increase. When the recovery begins, probably not until late 2008 or sometime in 2009, progress will be very disconnected. This is not a normal cyclical downturn and the recovery will take longer. Low interest rates and lender incentives pulled many first-time homebuyers into the market before they normally would have bought. As a result, little pent-up demand exists as higher mortgage rates will make buying less attractive. The feds loosening of interest rates should help, but the key in 2008 will be finding ways to bring buyers back into the market.
Capital flows: Global fund flows into real estate were enhanced by Wall Street debt securitizations, which connect U.S. property markets to vast fixed-income investment pools. Emerging from the credit crisis, fixed-income investors became more rational, while lenders tighten underwriting and debt costs more. Cash buyers appear ready to cushion possible market declines, but the swell of undisciplined capital buying will evaporate.
Economy: Since 2001 consumers have driven the economy, fed by skyrocketing home values. Now, sinking house prices and higher monthly mortgage payments threaten to sink consumer spending. Financial companies and investment banks need to weather the credit crunch without too many layoffs, which will help bring liquidity back to the market.
Questions or comments about this article? Contact the author - Mathew Roth