Housing Market Update. Buy, Sell or Hold?

Is the "irrational exuberance" in the housing market over? Will the real estate gold rush of 2005 resume? Is now the time to buy, sell or just hold on?

I lean toward the view that the recent improvement in housing inventory and pricing is more about lower interest rates, a warm winter and the normal spring selling season than it is a indication of a bottom in the market.

One statistic that backs up my position is that Home vacancy is at 2.7%, an all time historical high. The home vacancy rate measures how many homes for sale are also vacant. This is important because during a housing glut, owners of vacant homes are under more pressure to sell, (ie: much more likely to cut their asking price) than homeowners living in their for sale houses. This means continued downward price competion for sellers going forward.

A second bad omen for another housing boom is the lack of demand for housing. In the boom days, many home purchases were made by speculators, not owner occupants. This matters because speculators don't necessarily buy again after a sale. Owner occupants typically need to buy another home after they sell, creating more demand.

Thirdly, new home buyers are facing tighter lending practices and high interest rates. We have seen the last of the creative, "no-doc" or negative amortization loans which allowed marginal or subprime borrowers to qualify for mortgages. Additionally, as lending standards have tightened, many of those who planned to roll ARM's to more favorable mortgages may find themselves unable to qualify for a new loan, increasing the risk of foreclosure, for which filings have already increased 42% to 1.2 million according to RealtyTrac. As foreclosures continue to increase, the inventory glut worsens and asking prices follow suit.

The housing market is performing a bit better than it was a few months ago, but weak demand, higher interest rates, higher vacancy and foreclosure rates add up to a weak, spring selling season in most markets, especially in the areas surrounding Portland, Phoenix and most big cities in Florida.

Conclusion: Buyers are still in the driver's seat in 2007.

Check in tomorrow as we highlight the largest metro areas. See for yourself how the housing market is doing in your area.