Why the U.S. Real Estate Market is Slowing Down?


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As of June 2006, the sales in the U. S. real estate market have decreased for the eighth time in the last 10 months, directly accountable with increasingly mounting interest rates. Nonetheless, a certain level of consumer confidence has boosted, contrary to expectations.

Statistics show a 1.3% drop in home resales as it fell to a 6.62 million annual rate from May’s 6.71 million rate. The positive thing, however, is that the 6.62 million level of resales in June was slightly above the 6.60 million projected resales rate made by Wall Street analysts. Concurrently, average 30-year fixed interest rate was 6.68% in June, up from 6.60% in May. These resales statistics show signs that the U. S. real estate housing market is apparently equilibrating.

The median home prices also rise up from $229,000 in May to $231,000 in June. This translates to a 0.9% increase from corresponding median home prices in June 2005. Significantly, such price increase represents the lowest comparative year-over-year price gain since May 1995.

The inventory of unsold homes also rose to a new record of 3.725 million units. This is equivalent to a 6.8 months supply based on the June sales pace. Such a growing level of inventory, if it persists, would further decrease prices in coming months.

Statistics for demands on U. S. real estate properties are accrued for 4 regions in the U. S. Demand fell by 3.5% in the Northeast and 2.3% in the South. On the other hand, sales did not change from their previous levels in the Midwest and in the West.

The major alarming concern at present is that the imminent sharp drop in U. S. real estate sales could send serious repercussions through the entire U. S. economy, a potential slump akin to the economic recession in 2001 following the bursting of the stock market bubble in the previous year. Real estate investors generally express cautious optimism regarding the performance of the U. S. real estate industry in the coming years. The likelihood of still ever increasing interest rates curbs expectations of a robust year.

Tom Barrack, arguably the word's greatest real estate investor according to Donald Trump, thinks the catalyst for the slowing down of the U. S. real estate market performance is a steep rise in the price of construction materials as well as labor. “Construction costs have spiked 20 percent in the past nine months, " Barrack states. The reasons he enumerates are: shortages of labor and materials like lumber because of the boom in construction, and increases in the oil prices. Oil is an essential raw material that is required to produce materials such plastic piping, insulation, and shingles.

The direct effects will manifest first in speculative real-estate hot spots such as Miami and Las Vegas, where condo developers are pre-selling their projects for what appears to be substantial profits. Barrack predicts, “When [these developers] actually build the units over the next year or two, they will end up spending more then the units are now selling for. ” As a consequence, the developers will try to hoist selling prices. However, since speculation is the primary scheme in buying, Barrack claims that buyers will either “sue the developers to get the original price or take their deposits back and walk away. ” Hence, the developers will then lob the units back into the market, thereby contributing to the surplus of unsold condos. When the supply rises up, naturally the prices go down. The domino effect of busted deals brought about by rising construction costs is the underlying factor causing the deceleration of the U. S. real estate market.

By Earl Juanico

Miami Real Estate

By Earl Juanico - http://miamirealestateinc.com


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