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Commentary by Lawrence Yun

RISMEDIA, Feb. 11, 2008-There is no doubt that the great uncertainty currently facing the housing market is attributable, in large part, to a lack of confidence among potential home buyers. Statistics clearly suggest a sizable pent-up demand in the marketplace. Yet home sales have remained soft. What psychological factors explain the slowdown in home purchases? The developments in 2008 will be highly interesting to observe, especially how and when buyers will regain the confidence to enter the market.

Let’s roll the tapes on statistics from housing’s peak year in 2005 to the end of 2007:

-Average wages have risen by 8%. -There were 4.3 million job additions in the past two years.

-Total personal income was $1.4 trillion higher in 2007 versus 2005.

-Total household net worth (total household asset minus total liability) was more than $6 trillion higher in 2007 than 2005 (despite some losses in housing equity wealth).

-There were nearly 2 million new household formations over the two-year span.

The above numbers suggest that there are substantially more people with jobs at higher wages and with higher wealth accumulation. Despite the huge build-up in potential home buyers, we have the following housing figures:

-Far fewer home sales, with existing home sales down 20% and the more cyclical new home sales down nearly 40%. There were 6.5 million total home sales in 2007, which is 1.9 million fewer than in 2005.

-The national median home price is lower by 1%.

-Average mortgage rates are a tad higher at 6.3% in 2007 versus 5.9% in 2005.

What accounts for the divergence between sound economic fundamentals and worsening housing-market conditions? One reason for the pull-back is the removal of speculators from the marketplace and the virtual disappearance of subprime mortgages by late 2007. However, the excess demand from speculators and subprime lending would have accounted for, at most, 1.5 million home sales. Therefore, the current soft sales figures (1.9 million lower) are even below the level one would expect after removing all the excesses.

I believe the principle reason buyers are holding back is due to the excessive pessimism related to the housing market. There is fear among some that home prices will continue to fall. There are some who are looking to market time perfectly.

My bet is that this market timing trend will not last for an extensive period, and that buying a home for the long haul to accommodate life-changing family conditions will once again become the norm. Here, the fundamentals kick in and the pent-up demand gets released to the market place. There are plenty of low-cost, sound mortgage products today-from prime conforming loans to FHA government-backed loans. Jumbo loans are still problematic and carry unnecessarily high interest rates. That problem can be quickly solved, however, if the lawmakers simply raise the loan limit on Fannie/Freddie-backed loans. The higher loan limit will revive the hard-hit markets like California and Florida.

So what can everyday Realtors® do to increase business activity? First, spread the news of the pent-up demand with hard statistical facts. Second, call your legislators in this election year to raise the loan limit (check out NAR’s Call-to-Action Web page to voice your views to legislators). Lifting the loan limit will benefit Kansas and Kentucky as much as California and Florida, and will aid us in our current battle against the “irrational pessimism” that has momentarily taken over home buyer psychology and confidence. Lawrence Yun is the senior economist for the National Association of Realtors.

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