The Great "Head Fake" of 2006...

The data has been coming in at a fast and furious pace and it is clear to anyone who is paying attention:

THE Real (US Residential) Estate Market Correction of 2006 is almost over as soon as it began.

For years now the media has been telling us that real estate was headed for a "CRASH", that the "BUBBLE WOULD BREAK" and it would be "UGLY". Well the data is coming in and it is now clear that while the US residential market has slowed down, the major reason for the slow down had to do with the combination of interest rate increases (long and short term) and over-production by the nation's major home builders.

What is truly unique for all of us, and particularly those who have been around real estate for more than "One CYCLE", is the quality of the data that is available about Supply and Demand. While we have always had fairly good data on "Demand" (Historic Home Sales) it has been much more difficult, until the past 3-5 years to have good data on "Supply". The reason for this is that during the last real estate cycle, and last real estate "recession" the majority of homes were NOT built by national builders - today they are. With the creation of "publicly traded" home builder companies over the past 7-10 years, for the first time in US History we actually have somewhat of an accurate picture of what is going on at both a local and national scale when it comes to the supply side of home production.

I know as investors we like to think that the "World Revolves Around Us", but the reality is that Pulte and NV build more houses in a day in one city then even the most active investor will ever own in a lifetime.

In the past three days we have seen a lot of data released on housing, including current inventories and pricing by the national home builders and one thing is clear: The National Home Builders Have Turned OFF the Spigot! It has been confirmed to me that in Prince George's County alone, three of the national homebuilders are walking away from their purchase contracts for land. In other words, they are not going to build next year. However, the story does not end here, because people are still buying new houses. In fact, Coldwell Banker predicts that 2006 will be the 3rd best year on record for new home sales.

We have gone from a "Seller's Market" to a "Buyer's Market", but the "Buyer's Market is already starting to evaporate.

Today, National Association of Realtors Economist Ken Fears and Maryland Association of Realtors Chief Economist of the David Lereah, are both predicting that the buyers’ market will be short-lived.  Fears predicts that the market will reach a plateau later this year, with historically strong sales that will allow for robust revenues for real estate practitioners in the coming years.

For investors what this means is that a window of opportunity is opening and will soon be slammed shut. Anyone who was active in buying rehab properties over the past 18-24 months knows how hard it was to find a good deal because of the pricing. In the past 6 months pricing has softened with everyone thinking the "party was over". The party wasn't over, the bull was taking a break. But this window of soft pricing will not continue to remain open.

Yes, foreclosures are at a record high. But this is mainly due to people sitting on adjustable rate and "exotic" mortgages. In the past two months long-term fixed rate mortgages have actually declined and are predicted to decline even further this Winter and Spring. That means people who are looking to buy this coming Spring and have the capacity to get a "traditional mortgage" will find pricing heading higher. And those using adjustable rate and "exotic" mortgages (which get priced based on short-term interest rates) will find themselves in either a smaller house than what they wanted, or in an apartment.

Listen to everything you hear in the general media, but do not let some journalist with a high-shool education, who lives in a "flop house" dictate your investment strategy. If you do, you'll be scratching your head this time next year wondering "What Happened..."

Windows Open - Windows Close...