Analyst: 'It'll Get Worse Before It Gets Better'

By SHANNON BEHNKEN The Tampa Tribune

Published: Sep 9, 2007

Call it more bad news or perhaps a dose of reality, but Mike Larson, a real estate analyst with Weiss Research in Jupiter, takes a long view on any turnaround in the housing market. A student of the residential housing and mortgage market since 1998, Larson predicts the Tampa Bay area housing market has yet to hit bottom.

"This will get worse before it gets better. Then we'll have a drawn-out recovery, but ultimately, homes will become more affordable for an average family."

We asked Larson to make his case for a later recovery and to predict when the signs of a healthy market will appear. His observations:

Expect little relief until late 2008 at the earliest.

"It may even be 2009 before we see signs of a lasting recovery. And it will be a gradual recovery. Real estate goes in long-term cycles. Long, drawn-out up cycles followed by long, drawn-out down cycles."

Sellers of existing homes will have to lower their prices significantly to attract buyers.

"During the boom years, home prices rose to seven to eight times people's incomes. Homes were sold like cars were sold. Buyers didn't look at the price of the home but just what the payment would be. Now that lenders aren't offering the same kind of creative financing programs, prices need to come down so people can afford them with traditional financing."

Expect prices to drop another 10 percent.

"Median home prices are down about 8 percent from their 2006 peak in the greater Tampa area, according to Florida Association of Realtors figures. But the true price decline for many properties is probably closer to 10 percent to 15 percent. My prediction is that we probably have another 10 percent to go before all is said and done."

Expect new home construction to continue to decline until 2009.

"The supply of existing homes needs to come down before builders add to that inventory. Home starts are declining somewhat, but we need to see more of that. Builders have to lay low for a while."

Interest rates could come down soon.

"I expect the Federal Reserve to cut interest rates when they meet Sept. 18, and there will likely be another interest cut or two in the next year. A traditional, 30-year fixed rate is about 6.4 percent now. Historically speaking, 6.4 percent is a bargain, even though rates went as low as 5 percent and averaged around 51/2 percent during the boom. I think rates will come down to 6 percent or the high-5 percent range over the next 12 to 18 months. This will help, but it won't have an immediate effect on the market."

The credit crunch will get worse before it gets better.

"Right now, it's a real crisis. Two to four months down the road, the crisis will start to sort itself out, but it will get worse first. I think it will become harder to get a mortgage than it was in 2003 to 2006 if you have poor credit or little money to put down. But if you're a conventional, plain-vanilla mortgage borrower, you can still get a pretty good rate. We're going to get back to more bank mortgages instead of the broker on the corner putting people in subprime mortgages."

Foreclosure rates will continue to rise, and that will push prices down.

"As the market works through the downturn, more people will decide to hand the keys back over to the bank. And when banks need to sell foreclosed homes, they are aggressive and cut prices. If you're trying to sell in the neighborhood [where there are many foreclosures], you'll have a lot of competition and will have to lower your price."