Where's housing market going? ARTICLE REPUBLISHED FROM HERALDTRIBUNE.COM
SUNDAY, JUNE 4TH, 2006

ARTICLE BY: JOHN TUCCILLO

One of the major news topics these days -- especially in Sarasota -- is the state of the real estate market. The numbers seem all to be going in the wrong direction. Inventory is up (drastically); sales are down and prices are rising at only single-digit rates. This will be a down year for real estate. It will be worse than 2005. But -- to add some perspective -- it will also be better than any year of the 20th century.

The concerns being expressed are not limited to Sarasota, but the attention here is much more intense, if one judges by the press. There is a simple explanation for this. The motives of journalists actually have nothing to do with housing; they are interested in riding a hot story until a juicier one comes along, and the Sarasota real estate market has been a hot story.
Additionally, journalists often become part of the story; their work has its effects as buyers and sellers read the stories and adjust their behavior accordingly.

The truth is that, after 10 years of almost continual expansion, the housing market is slowing down. But it is not collapsing and will revive again after a pause. In some parts of the country, that pause will last longer than in others. On the west coast of Florida, it's likely to be shorter than elsewhere.
Let's try to make sense of all of this

.What goes up must come down -- but not as far. The history of real estate markets around the country (and, by the way, there is no one real estate market, there are thousands) is that when they shoot up, they correct by just stopping. In other words, several years of double-digit appreciation will be followed by several years of zero or low appreciation. So, your property may not be going up in value as dramatically as it once did, but it probably won't lose value.

People are still flocking to Florida. The entire housing market is favored by a population structure that keeps demand high. Baby boomers, immigrants and young buyers have flooded the market with demand that keeps upward pressure on prices. Since 2000, an average of 191,000 people (net) have come to Florida. The Census Bureau believes that this will continue through at least 2030. This creates a steady demand that will support a strong housing market. More important, despite what we think, people moving in from the Northeast find Sarasota prices still very attractive.

Sellers are the last to get it. At this stage of the real estate cycle, sellers tend to overvalue their property and price it above the market. Some real estate agents, seeking listings, are enablers of this. So, when a property hits the market for $375,000, and then has to be reduced to $350,000 to sell, it doesn't mean that the value of that property has fallen; rather it means that the property was worth only $350,000 to begin with. Of course, the fact that the seller bought it in 1994 for $90,000 is irrelevant. When properties are discounted, it's often a case of the seller overreaching rather than the market falling.

There are cases where property values fall, but they are rare. There are two circumstances when real estate values can actually fall, and have fallen. The first is when the local economy fails. So, $10 a barrel oil devastated Texas, Oklahoma and Louisiana in the early Nineties, the Tech Wreck of 2000 hurt Silicon Valley badly, and I don't see much hope for southeastern Michigan for the next several years. These are localized events and they will have localized impacts. This is cold comfort for property owners in these areas, but it doesn't affect the rest of the nation. This type of collapse is not about to happen in Southwest Florida. The number of retirees supporting significant medical and financial service industries as well as the large volume of transfer payments (pensions, etc.) coming into the county will keep the local economy growing for the indefinite future. More important, government reports indicate that of the 20 fastest-growing labor markets, 11 are in Florida and Sarasota ranks seventh.

Statistics measure real estate that sells, not the value of a particular property. The most widely disseminated number, the National Association of Realtors median price, measures the prices of properties that sell. There are other measures that actually track given properties, but they are less widely known. So, if sales fall, but the properties actually sold are of higher price, the median price will rise. This may seem illogical, but it's a function of how the data are collected. Remember this: Prices always trail sales. Even after sales fall, prices will continue to rise, and even after sales rise, prices will stagnate.

So, where does all this leave us? Nationally during 2006, real estate sales will fall by about 10 percent (a seemingly small number, definitely significant) but prices will rise by about 4 percent.
For Sarasota, the numbers will be close to the national rates. This allows you to choose your view. Is it a glass half full, or half empty?

John Tuccillo is a real estate and housing finance economist who lives in Sarasota. His latest book is "How a Second Home Can Be Your Best Investment (McGraw-Hill, 2004).