Real Estate Expected to Flounder in 2007

Although few experts predict that home values will fall dramatically in 2007, many economists say that prices won't improve for 12 to 18 months. And without the cushion of rising home equity — which softened the blow of high oil prices last year and kept consumers buying big-ticket items at a rapid clip — Americans may lose confidence in their finances, and the broader economy is likely to suffer.

Ambitious building booms in many markets in the past half-decade, combined with mortgage interest rates that have increased about 1 percent in the past year, have resulted in residential real estate stagnation. The gridlock defies conventional wisdom, stubbornly remaining neither a buyer's nor a seller's market.

"We are currently experiencing the worst of the market freeze, which is being exacerbated by the gap between the buyer's desire for bargains and the seller's fantasy of what they once thought their homes would be worth," said Diane Swonk, chief economist for Chicago-based Mesirow Financial, who forecasts a rebound in early 2008. "The good news is that there are some signs of stabilization. The bad news is that a substantial backlog of unsold homes still exists."

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Homeowners Falling Behind On Mortgage Payments

The delinquency rate for residential mortgage stood at 4.67 percent of all loans outstanding in the third quarter of 2006 on a seasonally adjusted basis. That's up 28 basis points from the second quarter, and up 23 basis points from one year ago, according to Mortgage Bankers Association's National Delinquency Survey.

The survey noted that consumers holding subprime and FHA mortgages registered the largest increase in delinquency.

Subprime loans carry higher interest rates and most often are sold to consumers with modest income and little or no credit.

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First-Time Home Buyers Look at Houses Again

High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back.

The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.

First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for first-time buyers to buy homes in many parts of the country, an important factor in the recent housing downturn.

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Most Profitable Renovations

Renovation costs are shooting higher and homeowners are getting a lot less bang for their remodeling bucks, according to a report by the National Association of Realtors (NAR) and Remodeling Magazine.

Last year, for example, adding a master bedroom suite to a house cost an average of $75,959 nationwide and boosted the home's resale value by $64,419 - that's 84.8 percent of the cost recouped. The same job this year cost a lot more - $94,331 - and returned just $68,458, or 72.6 percent.

The Harvard University Joint Center for Housing Studies estimates that Americans will spend nearly $160 billion for home remodeling projects over the next 12 months.

Many costs associated with remodeling have spiked. Last year, the national average for a midrange kitchen renovation was $43,862, according to NAR. But this year, that average cost had leaped to $54,241.

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Home Prices Going Up, Down, Sideways

Is real estate heating up, cooling down, headed for a deeper freeze, or just hanging in there despite the challenges?

Pick your own theory, but the latest federal report on home real estate price appreciation offers support for each of those scenarios. The third-quarter "house price index'' compiled by the Office of Federal Housing Enterprise Oversight examined changes under way in 275 of the largest metropolitan markets.

Unlike other studies, the index survey tracks actual value shifts in millions of existing houses whose mortgages are owned or included in securities guaranteed by Fannie Mae or Freddie Mac.

Read more about the four possible scenarios considering the future of the real estate market…