When will the housing market reverse gears and start moving upward again? That question is on everyone's mind, from nervous sellers to wary buyers, from anxious realty professionals to eager builders and developers.

No one knows for sure, of course. But Irvine, Calif., real estate consultant John Burns suggests the turnaround may come sooner rather than later, at least in some high-profile markets. In fact, the economist says some places could see a reversal of fortune by next year.

Burns sees a stable housing market as three-legged stool, he told his clients in a recent newsletter. One leg is demand, represented by the number of would-be buyers. Another is supply, or the number of active sellers. And the third is investment, which he defines as a mixture of affordability, consumer confidence and speculative activity.

Currently, he pointed out, the demand leg is the only one of the three that is on solid footing. Indeed, the underlying demographics "support healthy demand for many years to come," he wrote, explaining there is a real need for some two million new units alone each and every year for the next ten.

"Demand is our primary hope for avoiding a crash landing," Burns says.

While some naysayers argue that housing prices are free-falling towards a crash landing, Burns isn't in that camp. Prices may be falling, he points out, but at least most consumers aren't worried about losing their jobs. Indeed, the number of new jobs continues to rise every month, albeit at a slower pace, and the unemployment rate remains exceptionally low.

The supply leg, meanwhile, will probably take a while to correct itself, but certainly within the next 12 to 48 months, depending on the market, according to Burns.

Currently, the number of unsold homes under construction is at an all-time high, as is the number of unsold existing homes. And Burns says the situation will need time to correct itself over time -- less time in submarkets close to job centers and more in outlying areas where most people commute long distances.

The increase in unsold listings was this cycle's early warning indicator, the economist points out. And a decline will be the sign that the market is rebalancing itself. "The supply problem will be resolved when the market returns to 2.5 months of supply in the resale market, and only a few standing units of inventory in a typical new home subdivision," he says.

As Burns sees it, the correction "could take years" in outlying areas. In built-out markets such as San Diego, over-supply is "likely to correct earlier" than in sprawling markets like Phoenix. But economic growth will "play a huge role as well," and help many markets recover sooner.

Burns also notes that home builders have already corrected for their share of the over-supply. During the boom years, builders overbuilt the market on a national basis by about 15 percent, he wrote. Last year's construction pace was at about 2.3 million units, but the rate has already slowed to 1.8 million, which is less than the 1.9 million to 2.1 million units a year that are needed to satisfy the demographics of the housing market.

The housing economist told his clients to worry more about the location and price of the oversupply than the overall number itself. The Nation's Capital is one example where location and price matter more. In the Washington metro area, a healthy ratio of 2.2 jobs were created for every new housing start. Unfortunately, most of the development is occurring outside the market's main employment centers.

And D.C. is not alone. In Phoenix, the largest number of resale houses on the market are on the outskirts of town, which is exactly where home builders are most active. And construction in Tampa, Orlando and Sacramento, to name just a few places, is most active far away from where the jobs are.

According to Burns, the investment leg of the stool is the wild card. Demand is strong, just not at current prices, he says. "Affordability is an issue in the major markets, but not everywhere."

On the other hand, consumer confidence is strong. In fact, it hasn't been an issue, at least not like it has been in previous down cycles, largely because most folks are secure in their jobs, the housing consultant says.

But speculators remain a bugaboo. At the height of the market, Burns says, "an unprecedented level of investors created 40 percent more sales activity" than should normally have been created. Now, we have to wait and see how they will react. Will they hold until the market turns more favorable, or will they panic and sell at any price just to be over and done with it?

As in politics, all housing markets are local. But if you are watching the national numbers, Burns concludes that 5.6 million total sales -- both new and used -- is indicative of a normal level of demand.

In June 2005, the annual rate reached 8.5 million. But it has already slowed to 7.3 million. Unfortunately, he believes the market will need to over-correct to below the 5.6 million benchmark because of affordability problems and the huge number of investors before it can right itself and begin heading north again.

Published: October 11, 2006

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.