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Yun: Economist sees rush of home-buyers in early 2010

By Brian E. Clark
For WisBusiness.com
The Wisconsin real estate market recovery that began in the third quarter of this year will continue into 2010, with gains of 15 percent expected.
That’s the forecast of Lawrence Yun, chief economist with the National Associaton of Realtors. He spoke recently to members of the Wisconsin REALTORS® Association in Waukesha and talked to a WisBusiness.com reporter later.
Though the Badger State housing market was in sad shape earlier this year -- with existing home sales falling nearly 23 percent in the first quarter compared to the same period in 2008 -- Yun said Wisconsin was much better off than the states of Florida, California, Nevada and Arizona.
That’s because the Midwest did not experience much of a bubble or subsequent crash in home values, he said.
“Price decreases here were very modest,” he said.
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Still, he said, home sales fell dramatically because consumers held off on purchases, mainly over concerns that values would decline. In Florida and the Southwest, housing prices tumbled 20 percent to 30 percent, he said.
By the third quarter, Wisconsin home sales had risen 5.8 percent over the same period in 2008. That leap was driven primarily by first-time buyers responding to an $8,000 federal tax credit.
Because the credit was extended to the middle of 2010, he predicted fourth quarter figures will be even higher.
He also forecasts a rush of buyers coming into the market by the time spring rolls around, which will shrink the inventory of houses, stabilize prices and set the table for modest price increases and a broader economic rebound.  
But he said the market has been nuanced, with most of the activity in housing’s lower-cost range. Sales of mid-range homes have been sluggish, with very little activity for higher-priced dwellings, which often require expensive “jumbo loans” that can have a 2 percent surcharge.  

“But the worst is now over,” he said. “Sales will be first to recover and then prices will catch up. Given that Wisconsin market did not experience the bubble, homes valued at $150,000 are very affordable.
“So if people stay within their budgets, the market will again be driven by typical, normal factors like job creation and relocation and changes in family circumstances. Now, it’s a matter of healing and trying to return things back to normal. We will begin to see that in 2010.”
All in all much about the housing market is improving, he said. And that should buoy the overall economy.
“We’ve been in a housing market recession for four years and are beginning to see recovery. Momentum is building.  
“Housing always been the leading indicator for the broader economy. It was the housing market downfall that brought the rest of the economy down. But now that the housing market is beginning to show life signs, the economy appears to be coming out of the recession, too.”
But he said job gains may be slow in coming.
“At first, there is a production recovery, not a job market recovery,” he said. “But as production and overall economy recovers, sometime around spring of next year, we may begin to see job creation for the economy as a whole.”
Yun said he does not expect to see another housing bubble and crash cycle for decades, in part because both lenders and consumers have been burned.  
“This was really a credit bubble, because lending was so loose that mortgages were available for many who in hindsight were not qualified and also people overstretching their budgets,” he said.
“So I think going forward, a credit market bubble related to real estate won’t occur again for another 50 years or maybe even a century.
“There will be more caution by lenders and also consumers, who will probably will want to stay well within their budgets, which is a wise choice.
“Even in the absence of any federal legislation, automatically the bubble will not resurface,” he said.  
But Yun said he believes there should be tighter federal regulation of capital reserve ratios so lenders won’t become overleveraged.
“There also should be more transparency so that people who evaluate the complex mortgage securities can better understand the risk involved instead of giving an easy triple-A rating.”
Both lenders and consumers falsely “thought they could stretch the goal line a bit,” he said.
But he said bankers now have become more conservative and are returning to the old-fashioned way of doing business, which means they are saying: “Show me your income and let’s make sure you have the responsibility to make the mortgage payment. It’s going back to the way that things were done in the past and old-fashioned underwriting standards.”
He said Wisconsin escaped the housing bubble because it has a much smaller second-home market than southwestern states and Florida, meaning less speculative building.
“Even on the lending side, many who brought out the risky subprime loans were based right there in Southern California or Las Vegas,” he said. “That's where they were very loose with credit, in part because of their proximity.”
Though some Wisconsin banks made bad loans, Yun said there may also have been a cultural resistance to the risky business that flourished in the Southwest and Florida, though Minneapolis did have some speculative building, he said.

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