- The Washington Times - Wednesday, December 27, 2006

Forecasting the stock market, mortgage rates or real estate industry can be tricky business. That doesn’t stop folks from trying, though, because what lies ahead matters quite a bit to a whole lot of people. Even moderate changes in these markets can affect the pocketbooks of millions.

So, with the tumultuous housing market of 2006 nearly over, what can we expect out of 2007?

Will home prices come down or go up? Will homes be even harder to sell, or will sellers regain a bit of the advantage they lost so profoundly this year?

John McClain gets paid to answer these kinds of questions. He’s deputy director of the Center for Regional Analysis at George Mason University.

When Mr. McClain looks forward to 2007, he sees four key things: First, the market adjustment we’ve experienced over the past 14 months will come to an end, which will allow prices to stabilize.

Second, home prices will rise 2 percent to 5 percent next year.

Third, the volume of home sales will drop back to 1998-99 levels.

Finally, the average time it takes to sell a home will level off at about 90 days.

These represent a moderately optimistic outlook — not the kind of doom-and-gloom predictions that often are heard these days.

How can Mr. McClain be so positive? It helps to look back before we look forward.

From 2000 to 2005, the Washington metropolitan area was one of the hottest housing markets in the nation. Home values doubled, and you could sell a beat-up, overpriced home in just a few days, without contingencies.

Sure, the nation’s housing market has cooled recently, but this area has cooled less than other areas. Despite the slowdown that has shaken the confidence of Washington-area sellers, this remains one of the nation’s best housing markets.

Why? It’s because of the federal government. Federal spending makes up one-third of our region’s economy, and federal procurement has expanded dramatically during the past several years.

From 2002 to 2004, federal procurement spending in this region expanded by nearly $19 billion. Compare that with 1992 to 1994, when spending increased by just $3 billion.

How does all that federal spending affect housing?

In a word: jobs. Those procurement dollars meant new federal jobs and lots of work for federal contractors. As a result, the Washington area has one of the lowest unemployment rates in the nation and is attracting some of the nation’s best and brightest to work in homeland security, technology and government.

Many of these employees are well-educated and well-paid folks who can afford our expensive real estate.

“There have been a lot of people moving to this area from places like New York, Boston and San Diego — these are more expensive markets, so buyers from those areas could afford to pay more for a home,” Mr. McClain says.

Because buyers like these often sold more expensive homes in their previous cities, they typically can afford to bid up the price of a home here. That contributed to the doubling of area home values from 2000 to 2005.

However, home values outpaced income growth during those years, and the market reached a tipping point in late 2005. Buyers started pulling back when prices got too high. Hence the slowdown.

Mr. McClain can afford to be optimistic, however, because the same federal spending that has always fueled our economy will continue to do so.

“And, we continue to face a deficit in total housing units,” Mr. McClain says. “The workers are here, but they are living in Culpeper County, Baltimore and Pennsylvania.”

That housing shortage won’t go away anytime soon. The Center for Regional Analysis predicts that the region will add another 60,000 jobs next year — a total of 200,000 during the next four years.

All of those new workers will need housing, and builders can hardly find any land on which to build near the Beltway.

That means existing housing close to the jobs will continue to be in demand, and that is why the region’s housing market looks good for 2007 — not as good as the past several years, for certain. It still will be a buyer’s market.

But Realtors know how to be positive about the market no matter how it looks.

Margaret Ireland, 2006 chairman of the Northern Virginia Association of Realtors, points out that the 2006 buyer’s market provided home shoppers with more homes from which to choose, more time to make a decision, less pressure to outbid other buyers and the opportunity to shop around for the best loan and more concessions from sellers.

“Buyers were rushing past some of these things before,” Ms. Ireland says. “But now, the buyer’s market may be leveling off. We don’t know how long it will last.”

Ms. Ireland is referring to the recent drop in the inventory of homes for sale. Some of the drop is seasonal. The inventory drops every fall and doesn’t rebound until spring.

However, the number of new listings entering the market was down significantly in recent months. If that continues, it could reduce the number of homes available to buyers in 2007. That, in turn, could cause the market to warm up next year.

So, can anyone really predict what will happen in real estate next year? No, and don’t believe anyone who says he or she knows for certain what lies ahead.

Nevertheless, a lot of things are pointing to a decent, perhaps even strong, 2007 housing market in the Washington region.

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