State of the Market: What’s Ahead for Real Estate in 2008

Santa Fe is no different than most real estate markets across the country—whipsawed by the credit crunch brought on by loose lending standards, buyers waiting for their homes to sell in other cities, prices to continue to correct in Santa Fe, and a Fed worried about recession one moment and inflation the next, and increasingly, stagflation. Against this macro backdrop of confusion and occasional chaos, we’ve seen a year of swelling inventories in Santa Fe in most price ranges (particularly under $750,000), many price reductions, and a twenty-one percent decline in unit sales, although the upper end (above $1.5 million) has held steady, as it did in much of the country. If the economy teeters toward recession in 08, expect a deterioration even in the upper end.

According to the National Association of Realtors (NAR), existing home sales for 07 for the country are expected to fall about 12.5 percent, to 5.67 million units, the lowest level in five years. NAR also predicts that the median price for existing homes—that point at which half sell for more and half for less—will drop by 1.9% to $217,000. If median prices fall at all, it will be the first time in 40 years. In Santa Fe, through December 07, this compares to about a six percent increase in the median price, to about $435,000, a jump largely due to relatively strong upper end sales.

According to the Standard & Poor’s/Case-Shiller indexes, which measure the residential markets in 20 major metropolitan areas, home prices have declined on average 6.1 percent from October 2006 through October 2007. Only three of the twenty cities—Seattle, Portland and Charlotte, N.C.—experienced (small) price increases during this period.

The NAR, as may be expected for an industry trade group, reads the tea leaves somewhat positively for 08. While many experts, predictably bankers, predict continued weakness in unit sales and falling prices (one economist, citing slowing job growth and a borderline recession, forecast existing home sales to drop to 4.7 million units and prices to decline another 5 to 7 percent), NAR foresee a slight rise to about 5.7 million homes and prices to stabilize.

Why is NAR and its chief economist, Lawrence Yun, bucking the tide of pessimism?

Believing that the Fed will come to the rescue with a series of rate cuts and, along with European central banks, strategies to bolster liquidity, Yun thinks the American consumer will continue spending. Benefiting from relatively low inflation and stable real estate pricing, he sees more green lights than red in 08. Three-dollar-a-gallon gas seems to have reached a level of psychological acceptance, he believes. Most important, Yun reasons that the recent Federal bailout for some subprime mortgagors with government-backed loans will help stabilize the lending market.

“Despite over-exaggerated negative coverage on the housing conditions, many local markets are actually seeing price increases. Mortgage availability is improving,” Yun declared at a December press conference.

Whether or not Mr. Yun’s crystal ball is accurate, crucial to the Santa Fe housing recovery are not just a cooperative Fed and more hospitable lending standards, but how the City Different markets itself, if at all. Among the media and travel magazines in particular, Santa Fe is a consistent top-ten finisher as a city to visit, but usually fails the test as one of the most desirable places to live. Santa Fe is not inexpensive, which keeps it off many lists, but so does a fear among certain city officials of letting the rest of the world in on a well-kept secret. Santa Fe may not be the Magic Kingdom but the anecdotal evidence of residents’ satisfaction with their city seems extraordinarily high. On top of our natural beauty, climate, history, depth of culture, and diversity of lifestyles, opinions and passions, change is in the air with the Railyard development, the new Convention Center, the New Mexico History Museum, and a burgeoning base of small and environmentally sound businesses. Blessings aplenty, to be shared by all. The world should know.