A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent began following a national home price peak first identified in July 2006. Because realty trades in illiquid markets relative to financial assets like common stock, timely valuation lags true values from three months to a year. Certain markets, including San Diego and Detroit, peaked as early as November 2005. A real estate bubble is a type of economic bubble that occurs periodically in local, regional, national or global real estate markets. A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by a market correction in which decreases in home prices can result in many owners holding negative equity, a mortgage debt higher than the value of the property.
Timeline
Main article: Timeline of the United States housing bubbleMarket correction predictions
Based on the historic trends in valuations of U.S. housing, many economists and business writers have predicted a market correction, ranging from a few percentage points, to 50% or more from peak values in some markets, and, in spite of the fact that this cooling has not affected all areas of the U.S., some have warned that it could and that the correction would be "nasty" and "severe". Chief economist Mark Zandi of the research firm Moody's Economy.com predicted a "crash" of double-digit depreciation in some U.S. cities by 2007–2009. Dean Baker of the Center for Economic and Policy Research was the first economist to identify the housing bubble, in a report in the summer of 2002.
Market weakness, 2005–2006
The booming housing market halted abruptly for many parts of the U.S. in late summer of 2005, and as of summer 2006, several markets faced the issues of ballooning inventories, falling prices, and sharply reduced sales volumes. In August 2006, Barron's magazine warned, "a housing crisis approaches", and noted that the median price of new homes dropped almost 3% since January 2006, that new-home inventories hit a record in April and remained near all-time highs, that existing-home inventories were 39% higher than they were just one year earlier, and that sales were down more than 10%, and predicted that "the national median price of housing will probably fall by close to 30% in the next three years … simple reversion to the mean." Fortune magazine labelled many previously strong housing markets as "Dead Zones;" other areas were classified as "Danger Zones" and "Safe Havens." Fortune also dispelled "four myths about the future of home prices." In Boston, year-over-year prices dropped, sales fell, inventory increased, foreclosures were up, and the correction in Massachusetts was called a "hard landing". The previously booming housing markets in Washington DC, San Diego CA, Phoenix AZ, and other cities stalled as well. Searching the Arizona Regional Multiple Listing Service (ARMLS) shows that in summer 2006, the for-sale housing inventory in Phoenix has grown to over 50,000 homes, of which nearly half are vacant (see graphic). Several home builders revised their forecasts sharply downward during summer 2006, e.g., D.R. Horton cut its yearly earnings forecast by one-third in July 2006, the value of luxury home builder Toll Brothers' stock fell 50% between August 2005 and August 2006, and the Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006. CEO Robert Toll of Toll Brothers explained, "builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are canceling contracts for homes already being built." Homebuilder Kara Homes announced on 13 September 2006 the "two most profitable quarters in the history of our company", yet filed for bankruptcy protection less than one month later on 6 October. Six months later on 10 April 2007, Kara Homes sold unfinished developments, causing prospective buyers from the previous year to lose deposits, some of whom put down more than $100,000.
As the housing market began to soften in winter 2005 through summer 2006, NAR chief economist David Lereah predicted a "soft landing" for the market. However, based on unprecedented rises in inventory and a sharply slowing market throughout 2006, Leslie Appleton-Young, the chief economist of the California Association of Realtors, said that she was not comfortable with the mild term "soft landing" to describe what was actually happening in California's real estate market. The Financial Times warned of the impact on the U.S. economy of the "hard edge" in the "soft landing" scenario, saying "A slowdown in these red-hot markets is inevitable. It may be gentle, but it is impossible to rule out a collapse of sentiment and of prices. … If housing wealth stops rising … the effect on the world's economy could be depressing indeed." "It would be difficult to characterize the position of home builders as other than in a hard landing", said Robert Toll, CEO of Toll Brothers. Angelo Mozilo, CEO of Countrywide Financial, said "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." Following these reports, Lereah admitted that "he expects home prices to come down 5% nationally", and said that some cities in Florida and California could have "hard landings." National home sales and prices both fell dramatically again in March 2007 according to NAR data, with sales down 13% to 482,000 from the peak of 554,000 in March 2006 and the national median price falling nearly 6% to $217,000 from the peak of $230,200 in July 2006. The plunge in existing-home sales was the steepest since 1989. The new home market also suffered. The biggest year over year drop in median home prices since 1970 occurred in April 2007. Median prices for new homes fell 10.9 percent according to the Commerce Department.
Based on slumping sales and prices in August 2006, economist Nouriel Roubini warned that the housing sector was in "free fall" and would derail the rest of the economy, causing a recession in 2007. Joseph Stiglitz, winner of the Nobel Prize in economics in 2001, agreed, saying that the U.S. might enter a recession as house prices declined. The extent to which the economic slowdown, or possible recession, would last depended in large part on the resiliency of the U.S. consumer spending, which made up approximately 70% of the US$13.7 trillion economy. The evaporation of the wealth effect amid the current housing downturn could negatively affect the consumer confidence and provide further headwind for the U.S. economy and that of the rest of the world. The World Bank lowered the global economic growth rate due to a housing slowdown in the United States, but it did not believe that the U.S. housing malaise would further spread to the rest of the world. The Fed chairman Benjamin Bernanke said in October 2006 that there was currently a "substantial correction" going on in the housing market and that the decline of residential housing construction was one of the "major drags that is causing the economy to slow"; he predicted that the correcting market would decrease U.S. economic growth by about one percent in the second half of 2006 and remain a drag on expansion into 2007.
Others speculated on the negative impact of the retirement of the Baby Boom generation and the relative cost to rent on the declining housing market. In many parts of the United States, it was significantly cheaper to rent the same property than to purchase it; the national median mortgage payment is $1,687 per month, nearly twice the median rent payment of $868 per month.
Major downturn and subprime mortgage collapse, 2007
The bursting of the bubble
The booming housing market appears to have halted abruptly in many parts of the U.S. in the late summer of 2005, and by the summer of 2006 several markets were facing the issues of ballooning inventories, falling prices and sharply reduced sales volumes. In August 2006, Barron's magazine warned that "a housing crisis approaches", and noted that the median price of new homes had dropped almost 3% since January 2006; that new-home inventories hit a record in April 2006, and remained near all-time highs; that existing-home inventories were 39% higher than they had been just one year before; and that sales were down more than 10%. It also predicted that "the national median price of housing will probably fall by close to 30% in the next three years ... simple reversion to the mean." Fortune magazine labelled many previously strong housing markets as "Dead Zones;" it classified other areas as "Danger Zones" and "Safe Havens". Fortune also dispelled "four myths about the future of home prices." In Boston, year-over-year prices were dropping, sales were falling, inventory was increasing, foreclosures were up, and the correction in Massachusetts was termed a "hard landing". The previously booming housing markets in Washington, D.C., San Diego, Phoenix and other cities were also stalled. A search through the Arizona Regional Multiple Listing Service (ARMLS) shows that by the summer of 2006 the for-sale housing inventory in Phoenix had grown to over 50
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