Article in December 29, 2006 Detroit Free Press

HOUSING AND DEVELOPMENT: Area home sales mixed

Like U.S., Detroit rose but Wayne, Oakland didn't

BY MARGARITA BAUZA
FREE PRESS BUSINESS WRITER

December 29, 2006

As U.S. sales of existing homes showed an uptick in figures released Thursday, local sales in October increased in Detroit but fell in Dearborn and western Wayne and Oakland counties when compared to the same period a year ago. Specifically:

• 628 homes sold in Detroit in October compared with 594 in October 2005.

• 175 homes sold in Dearborn in October compared with 190 in October 2005.

• 716 homes sold in western Wayne and Oakland counties in October compared with 877 in October 2005.

National figures for existing home sales released Thursday showed that sales rose unexpectedly in November, as prices fell for the fourth month in a row, adding to evidence that the housing slowdown is ending.

U.S. purchases increased 0.6% last month, to an annual rate of 6.28 million, after they rose 0.5% in October. That marked the first back-to-back gains in monthly sales since March 2005, the National Association of Realtors said Thursday in Washington.

The report, coming on top of a bigger-than-expected jump in new-home sales reported Wednesday, suggests housing might be less of a drag on economic growth in 2007. That's in line with the Federal Reserve's forecast for growth at a moderate pace in the new year.

"It appears we've hit bottom," David Lereah, chief economist of the Realtors' group, said Thursday at a briefing in Washington.

Sales of existing homes, which account for about 85% of the U.S. housing market, are recorded when a contract is closed. New home sales, recorded when a contract is signed, are considered a more timely barometer of the housing market.

The number of previously owned homes for sale decreased 1% last month, to 3.82 million. That represented a 7.3 month supply at the current sales pace, down from 7.4 months in October.

The median price of an existing home in November fell 3.1% from a year ago, to $218,000, the fourth consecutive monthly decline.

State sales decrease

By October of this year -- the latest figures available from the Michigan Association of Realtors -- 16,482 fewer houses had sold in the state compared with October 2005.

In Western Wayne and Oakland counties 10-month sales fell from 9,495 in October of 2005 to 7,582 in October 2006, a drop of 20%. November figures are not available for Detroit-area markets because the statistics are reported quarterly.

Sam Baki, president of the Western Wayne Oakland Association of Realtors, says he expects the local sales numbers for November and December to be up. "There's a lot of activity right now," said Baki, a Realtor at Keller Williams in Northville.

He said buyers appear more comfortable with housing prices than they did a year ago, when both buyers and sellers were adjusting their expectations about pricing and sales.

"After the election especially, it picked up a little," Baki said. "People understand the market a little more, and anecdotally, there's been more activity in November and December. People are looking, making offers and showing houses."

David Elya, president elect of the Metropolitan Consolidated Association of Realtors and an agent with Realty Executives Group in Shelby Township, said he believes the Detroit-area market will see a lot of activity this spring.

"There are plenty of buyers that are waiting for good news," he said. "There's ample supply and good value out there. My Web activity is up, my phone calls have been up."

Article in December 26, 2006 Wall Street Journal

Renters Gloat Over Housing Slump
Some Who Missed the Boom
Are Feeling Vindicated Now;
Resisting 'Nesting Instincts'

By JAMES R. HAGERTY and GEORGE ANDERS
December 26, 2006

The housing slump has been painful for millions of people who work in real estate or recently bought a house.

For Patrick Killelea, however, this year has been one long victory lap. Mr. Killelea, a 41-year-old software engineer, has long preached that it makes more economic sense to rent than buy homes. He recalls shouting "Wow!" when he heard about September's 9.7% drop in prices of new homes.

"I didn't want to gloat," he says. "But then again, maybe I did."

For years, Americans who refused to buy real estate at what they considered excessive prices were ribbed for failing to profit from one of the greatest booms in history. "Are You Missing the Real Estate Boom?" needled the title of a 2005 book by David Lereah, chief economist of the National Association of Realtors.

Dean Baker, an economist, believes that the slump validates his decision to sell a two-bedroom condo in Washington's Adams Morgan neighborhood two years ago. Mr. Baker says he received $450,000 for the unit, which he had bought for just $160,000 in 1997. Since unloading the condo, he and his wife, Helene Jorgensen, also an economist, have been renting an apartment nearby for about $2,300 a month.

Mr. Baker concedes that he could have made an even bigger profit on the condo had he held it for another year or so but says it's impossible to time the market perfectly. While some economists argue that the housing slump is nearly over, Mr. Baker insists, "We're just at the beginning of it."

Mr. Baker has a history of forecasting bubbles early and often. He was quoted by newspapers in March 1997 -- three years before the tech-stock bubble burst -- as warning that equity prices were rising at an unsustainable pace.

That track record, he says, shields him from any snickering among his friends about his decision to cash out of real estate early. "Ever since I nailed the stock bubble, no one I know dares to razz me about my investment decisions," Mr. Baker says.

Rich Toscano did get some razzing from friends in early 2003 when he moved back to San Diego after a spell in Austin, Texas, and decided renting made more sense than buying. At that time, "it was universally agreed upon that real estate would always go up," Mr. Toscano says.

"I thought he was insane," says Mike Mannion, a friend who had met Mr. Toscano in the 1990s when they both worked for an information-technology consulting firm. The two friends spent hours debating over meals and coffee whether San Diego real estate was a good buy. In the end, Mr. Mannion rejected Mr. Toscano's warnings. Even though Mr. Mannion's wife, Christina, an architect, was nervous about the possibility of house prices falling, the couple plunged ahead and bought a three-bedroom house for about $580,000 in late 2003.

That proved a good buy. Home prices continued to soar in San Diego through 2004 and early 2005. But Mr. Mannion says he gradually began to be persuaded by Mr. Toscano's arguments about home prices soaring beyond many buyers' ability to pay. Last spring, Mr. Mannion and his wife put their house on the market and wound up selling it for $830,000. Now they rent and don't plan to buy until they're convinced the housing market has bottomed out. Before buying again, Mr. Mannion says, he will consult Mr. Toscano.

Of course, as even many hard-core renters acknowledge, homeownership has some big advantages, including tax deductions on mortgage interest, the possibility of gaining value over the long term and the security of knowing you won't be evicted by a capricious landlord. But some of today's renters say it has been a bad time to buy in the past few years, when speculators helped drive up prices at an unusually rapid clip.

David Jackson, a 26-year-old information-technology specialist, has been railing against the housing industry for two years -- ever since he made a vain attempt to find an affordable town house or condo in Silver Spring, Md. Unable to understand why prices were so high, he began researching the real-estate market and, he says, "came to the conclusion that there was a massive housing bubble." So Mr. Jackson decided to remain a renter. He pays $645 a month for part of a townhouse.

Now that the housing market is slumping, "I feel vindicated," Mr. Jackson says. "But I'm not looking forward to the coming recession." He believes that the housing slowdown and the effects of "a mountain of debt" on consumers will pull the entire economy into a slump.

Mr. Jackson blames what he calls "the housing industrial complex" in general and Mr. Lereah, the Realtors' economist, in particular. Since last year, Mr. Jackson has maintained a blog (davidlereahwatch.blogspot.com) devoted entirely to vilifying Mr. Lereah.

The blog recently offered a $75 cash prize for an essay containing "the most scathing criticism" of Mr. Lereah. Sample submission: "Dr. Lereah is a lying snake with the ethics of a dope-dealing pimp."

Mr. Lereah says he doesn't object to the blog. "There are people who believe it's the end of the world" for housing, he says. "They blame me for being positive."

Among all the defiant renters, few roar louder than Mr. Killelea, who pays $2,350 a month to rent a snug, two-bedroom craftsman house near Stanford University in Menlo Park, Calif. He figures it would cost him $7,000 a month in mortgage payments and taxes if he owned it.

Most mornings, he sits at a small pine table just off his kitchen and scans emails from acquaintances for any bad news that fits his world view. Before he heads off to work at a bank, he posts the dozen bleakest stories to his Web site -- patrick.net/housing/crash.html -- under the permanent headline, "U.S. Housing Crash Continues."

Almost anything grim will do. Economic assessments from Finnish newspapers pass the test. So does an ad from a Michigan home seller offering to cut his asking price $1,000 a day. One favorite posting consists of a spoof of a Realtor ad, showing a terrified woman screaming in front of a hideous house.

A native Midwesterner, Mr. Killelea worked in Chicago in the mid 1990s before moving to Silicon Valley in 1997 to take a job at Sun Microsystems Inc. He was excited about the $77,000 starting salary -- a 55% increase from his previous job -- until he discovered how much housing cost in California. He and his wife, Leah, rented for a few years in Palo Alto before deciding that they might find cheaper housing in Berkeley.

"We spent several months looking at open houses and bidding on properties," Mr. Killelea recalls. "We bid over the asking price, but never enough to win. On the last one, they were asking $395,000 and we bid $500,000. We got a call afterward, asking us if we wanted to raise our bid. We said, 'No.' We thought that was enough. It turned out that the house sold for $530,000."

After losing that Berkeley home, Mr. Killelea told his wife they were calling off the home-buying search. She says she wasn't thrilled. But they moved to a new rental -- their fourth in five years -- and nestled their two children into an upstairs bedroom with bunk beds.

Even though prices have come down a bit in parts of California, Mr. Killelea vows to resist the pressure to buy. Recently he mused on his Web site about why more people don't follow his example. "I get the feeling many wives are pressuring the husbands to buy," he wrote. "I know it's not politically correct to say so, but I think a lot of irrational purchases are driven by female nesting instincts."

Mr. Killelea says his wife has been "very understanding" about his refusal to buy at today's prices: "She can do the math, too."

But Ms. Killelea seems more open to the idea of homeownership. "We haven't really talked yet about when we'd want to start looking again," she says. "I think we're going to need to discuss that."

Article in November 29, 2006 Wall Street Journal

Distressed Real-Estate: Priced to Sell
Rising Home Foreclosures
May Create Opportunities
For Investors Buying in '07

By JAMES R. HAGERTY
November 29, 2006

As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn't produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

"We're all going to have to be more creative in the next 12 to 24 months" in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel's company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. "Word on the street is that California, Florida and Arizona will also be very active in the next 12 months," Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for "real-estate owned." They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year's second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower's default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year's first half. In Ohio's Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get "current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell," says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, "you can't think, 'Would I live here?' There are people at every level of income that need a roof."

Aricle in December 2, 2006 Wall Street Journal

You Can Buy a House
For $1,000 Today,
But You'll Pay a Price
Foreclosure-Auction Bargains
Often Need Costly Work;
Obscenities on the Wall

By JAMES R. HAGERTY
December 2, 2006

PITTSBURGH -- In an era when million-dollar houses are no longer exceptional, some homes sell for less than the price of a Brooks Brothers suit.

At an auction of foreclosed real estate here in April, Monte Lowderman struggled to entice someone to bid for a two-bedroom house in one of the city's roughest neighborhoods.

"Now, folks, I'm not telling you it's ready to move into," said the auctioneer. He paused, then added: "You know, the way to make money is recognizing potential."

Charles Lantzman, a real-estate investor here, didn't find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.

Nationwide, about 3,800 foreclosed homes sold for $1,000 or less in the first 10 months of this year, according to First American Real Estate Solutions, a data provider in Santa Ana, Calif.

Sales like these tend to occur in places like Detroit, Cleveland and Pittsburgh, where dying industry has left behind a surplus of what once was middle-class housing in neighborhoods now known for crime and bad schools.

More distressed homes are headed for the block. As the national housing boom fades, foreclosures are rising on subprime loans, those for people with weak credit records. A recent report from mortgage analysts at UBS AG in New York found that about 2% of subprime loans packaged into securities this year were in foreclosure by October, nearly double the year-earlier rate.

Foreclosed homes generally aren't a huge bargain. Savvy local investors know their value and compete to buy them. Still, as Mr. Lowderman noted, there is always the chance that one investor will spot potential where other bidders don't see any. And as lenders find themselves owning more foreclosed property, they become more eager to unload it as quickly as possible. The longer lenders hold these homes, the more they pay in taxes, insurance, lawn care and other maintenance.

In recent years, lenders and mortgage brokers have heavily promoted subprime loans. Many of the borrowers are people in poor neighborhoods who refinance their homes to take out cash or pay off credit-card debt.

The Pittsburgh house bought by Mr. Lantzman ended up at the auction because of one of those subprime refinancings that went bad. Allegheny County records show that CitiMortgage, a unit of Citigroup Inc., granted a $33,600 mortgage to the previous owner in February 2001, at an initial interest rate of 11.5%, which eventually would adjust twice a year, based on prevailing market rates, up to a maximum of 17.5%. In January 2002, the loan was sold to Household Finance, a unit of HSBC Holdings PLC. Household acquired the home through a foreclosure last year and put it on the block a few months later.

As is common in auctions, Household reserved the right to reject bids it deemed too low. A few days after the auction, Household asked Mr. Lantzman to consider raising his bid to $5,000 from $500. Mr. Lantzman sent back a list of problems he had spotted at the house, including damaged plumbing. As his trump card, Mr. Lantzman also mentioned a possible mold outbreak. (Banks hate owning houses with mold, he explains: "They don't want to hear about that.") He told Household his final offer was $700. Household accepted. Mr. Lantzman paid an additional $3,000 or so in auction fees and other transaction costs.

Citigroup and HSBC, Household's parent, both declined to comment on the case, citing customer privacy.

Busy with his day job as the owner of a small construction company, Mr. Lantzman didn't inspect his $700 house again for several months. Finally, one afternoon in August, he parked his sport-utility vehicle on Olivant Street in front of the narrow, two-story house with light-blue siding. The windows and doors of several houses on the street were boarded up. Mr. Lantzman walked warily around his house and noted signs of minor fire damage on one side. He discovered that the back door had been broken open. Shards of glass lay on soggy carpeting in the entryway. "Probably turned into a crack house," he muttered.

Once he began examining the inside with a flashlight, though, Mr. Lantzman was relieved. There were no signs of squatters.

"It actually doesn't look as bad as I thought," he said. He expects to spend $5,000 to $10,000 on renovations. Then he believes he will be able to rent the place for around $600 a month. Eventually, Mr. Lantzman hopes, the neighborhood will recover and house prices will increase.

At an auction in January, Jesse L. Thompson paid $1,000 for a three-bedroom house on East 97th Street in Cleveland. The house, white with mint-green trim, has been sold a dozen times since 1980, and lenders have foreclosed on it three times in that period, according to public records compiled by RealQuest, a unit of First American Corp. Mr. Thompson, who has been investing in real estate for more than 30 years, says the house needed replacements for a hot-water tank, heating ducts and water pipes stolen from the building during the latest foreclosure. After spending about $8,000 on repairs and redecoration, Mr. Thompson found a tenant to pay $550 a month.

It hasn't been easy, though. Shortly after Mr. Thompson bought the house, vandals broke in, spray-painted obscenities on the walls and sliced through electrical wires.

Mary Krawiec isn't impressed by $1,000 home purchases. Eight years ago, she bought a Victorian boarding house in Troy, N.Y., for $10.

The previous owners of the house had a $98,500 mortgage from KeyBank, a unit of KeyCorp, Cleveland. KeyBank foreclosed on the house in late 1996. At the time, an appraiser estimated the value of the house and lot at $52,000. The foreclosure led to an auction of the property, held by a court-appointed referee in the lobby of the Rensselaer County courthouse in Troy. At an initial auction in October 1997, no one bid for the house.

The referee, Richard T. Morrissey, held a second auction in November 1998. Ms. Krawiec says several other people attended, but she was the only one who showed any interest in bidding. Her opening offer was $1. She says the referee gave her a sour look. She raised her bid to $10 and held firm. The referee gave her title to the home in exchange for a $10 bill.

Ms. Krawiec acquired the house free of any liens from lenders or others but did have to pay an overdue water bill of about $2,000.

Usually, when bids at a courthouse foreclosure sale are far below the property's appraised value, a representative of the lender bids enough to purchase the home and then seeks to resell it later at market value. In this case, KeyBank made no attempt to acquire the house. Justin Heller, an Albany, N.Y., lawyer who represented KeyBank in the foreclosure, says he believes the bank decided that costs of renovating the house to make it salable might exceed its market value. A KeyBank spokeswoman declined to comment.

The boxy three-story house, in a middle-class neighborhood a few hundred yards from the Hudson River, is sheathed in pale yellow aluminum siding. Inside, years of neglect have left their mark, including a bowed stairway wall, crumbling plaster and a leaky skylight. Ms. Krawiec and her husband, Mark Peabody, are renovating the building's nine apartments. They estimate the total cost of fixing up the $10 house will be $65,000.

Ms. Krawiec and Mr. Peabody, a carpenter, do all the renovation work themselves. "I bought her a nail gun once for Christmas," Mr. Peabody says.

For now, the $10 house has three tenants, producing rental income of nearly $15,000 a year. Once all nine apartments are renovated, Mr. Peabody estimates, the house will yield rental income of $50,000 a year.

Article in November 29, 2006 Wall Street Journal

Fewer New-Home Sales as Prices Rise

By JEFF BATER

November 29, 2006

WASHINGTON -- New-home sales resumed declining in October, but the median price increased.

Meanwhile, the U.S. economy was stronger last summer than first thought because businesses accumulated more inventory and trade was less of a drag. Gauges measuring third-quarter inflation were lowered slightly, according to Wednesday's data revisions.

Sales of single-family homes decreased by 3.2% to a seasonally adjusted annual rate of 1.004 million, the Commerce Department said Wednesday. September sales climbed 3.7% to 1.037 million, revised from a previously estimated 5.3% advance to 1.075 million. Sales increased 2.1% in August but fell 9.2% in July.

The average price of a new home increased to $309,700 in October, up from $297,700 in September and $293,600 in October 2005, according to Commerce. The median price also rose, up to $248,500 last month from $218,200 in September and $243,900 in October 2005.

The sales numbers Wednesday were worse than what Wall Street expected. The median estimate of 23 economists surveyed by Dow Jones Newswires was a 2.3% decrease to an annual rate of 1.050 million in October.

Year-to-year, sales were down 25.4% since October 2005 as the housing market softens. Yet, in a glimmer of hope, the National Association of Realtors reported Tuesday sales of previously owned homes rose in October for the first time in eight months; still, year over year, sales were 11.5% lower.

New-home inventories receded in October. There were an estimated 558,000 homes for sale at the end of the month, the Commerce data Wednesday showed. That represented a 7.0 months' supply at the current sales rate. An estimated 562,000 homes were for sale at the end of September, a 6.7 months' inventory.

Financing costs drifted down in October. The average rate on a 30-year mortgage was 6.36%. It was 6.40% a month earlier -- yet 6.07% in October 2005.

By region, new-home sales last month fell 1.7% in the South, 5.6% in the Midwest and 39.0% in the Northeast. Demand was 3.2% higher in the West. Based on figures unadjusted for seasonal factors, an estimated 77,000 homes were actually sold last month in the U.S., down from 82,000 in September.

GDP Revised Up

Gross domestic product increased at a 2.2% annual rate July through September, the Commerce Department said Wednesday in its first revision to third-quarter 2006 GDP. The government initially estimated growth at 1.6%.

GDP has weakened as the housing slump weights down the economy. Second-quarter growth was 2.6% and GDP raced ahead at a 5.6% pace in the first three months of 2006.

The government's price index for personal consumption increased 2.4%, lower than the previously estimated 2.5% climb but below the second quarter's 4.0% rise. The PCE price gauge excluding food and energy increased 2.2%, lower than the previously estimated 2.3% climb and below the second quarter's 2.7% rise.

Corporate profits after taxes climbed 4.6% to $1.167 trillion in July through September from the second quarter, the report showed. In the second quarter, profits increased 0.3%. Year-to-year, profits surged 31.5% since the third quarter of 2005.

Revisions to inventories and imports were behind the adjustment to GDP, which is a measure of all goods and services produced in the economy. Wall Street expected a smaller upward revision to third-quarter GDP; the median estimate of 22 economists surveyed by Dow Jones Newswires was a 1.8% increase.

The revisions released Wednesday showed businesses increased inventories by $58.0 billion; originally, Commerce estimated a $50.7 billion increase. Companies had lifted stocks $53.7 billion in the second quarter.

The accumulation of goods added 0.16 percentage point to third-quarter GDP. Originally, Commerce said inventories subtracted 0.10 percentage point from GDP. Real final sales of domestic product, which is GDP less the change in private inventories, climbed 2.1%. The original estimate was a 1.7% increase. Second-quarter sales also rose 2.1%.

International trade was less of a restraint on GDP because imports didn't climb as much as first thought, according to the revised data. U.S. exports rose by 6.3%. Imports increased 5.3%. Originally, exports were seen up 6.5% and imports 7.8% higher. So, trade reduced GDP by 0.21 percentage points; initially, Commerce said trade cut third-quarter GDP by 0.58 percentage points. In the second quarter, exports had gone up by 6.2% and imports climbed 1.4%.

Residential fixed investment, which includes spending on housing, plunged by 18.0% in the third quarter, a bigger drop than the originally estimated 17.4%. Second-quarter spending tumbled 11.1%. The 18.0% drop translated to a cut of 1.16 percentage points in third-quarter GDP, and it marked the sharpest fall since 21.7% in the first quarter of 1991.

Businesses increased third-quarter spending more than previously thought. Outlays rose 10.0% July through September, higher than the originally estimated 8.6% advance. Business spending rose 4.4% in the second quarter. Third-quarter investment in structures surged 16.7%. Equipment and software increased 7.2%.

Third-quarter spending by consumers increased 2.9%, down from a previously reported 3.1% but above the second quarter's 2.6% advance.

Consumer spending accounts for the lion's share of economic activity -- about two-thirds. It contributed 1.99 percentage points to GDP in the third quarter; the original estimate was a contribution of 2.13 percentage points.

Purchases of durable goods rose 6.0% in July through September, below the previously reported 8.4% increase. Durables dipped 0.1% in the second quarter. Durable goods are expensive items designed to last at least three years, such as cars. Third-quarter non-durables spending increased by 1.1%. Services spending went 3.1% higher.

Federal government spending increased by 1.5%, revised down from an initially estimated 1.7% increase. Second-quarter spending fell 4.5%. State and local government outlays increased 2.6%.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose 2.1%, up from a previously estimated 2.0% climb but below the second quarter's 4.0% rise.

The chain-weighted GDP price index rose 1.8%, unchanged from the first estimate but below the second quarter's 3.3% rise.

Article in November 29, 2006 Wall Street Journal

Distressed Real-Estate: Priced to Sell
Rising Home Foreclosures
May Create Opportunities
For Investors Buying in '07

By JAMES R. HAGERTY
November 29, 2006

As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn't produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

"We're all going to have to be more creative in the next 12 to 24 months" in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel's company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. "Word on the street is that California, Florida and Arizona will also be very active in the next 12 months," Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for "real-estate owned." They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year's second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower's default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year's first half. In Ohio's Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get "current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell," says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, "you can't think, 'Would I live here?' There are people at every level of income that need a roof."

Article in November 26, 2006 Detroit Free Press

FOR SALE: THE STORIES BEHIND THE SIGNS: Sellers tough it out in buyer's market

Even with price cuts, homes sit and deals fall through

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

November 26, 2006

To the shared experiences of life in metro Detroit, from rooting for the Tigers to fretting over automotive layoffs, add a new one: not being able to sell a house this year.

Gilda Bone knows all about it.

Since she put her family's Saline duplex on the market two years ago, she's cut the price from $257,000 to $199,000 -- and still has no buyer.

Then there's John and Beth Fohrman of Ann Arbor, who each brought a home to their recent marriage. They sold John's house after cutting the price, closed on their new house and put Beth's condo up for sale in 2005. The condo remains on the market after five price cuts.

"It's a big inconvenience," John Fohrman said last week, "but we're grateful for our blessings."

Sales of houses and condominiums have plunged during the past year, in the worst housing market since at least the 1980s. As a result, prices have begun to decline sharply. Last week, the National Association of Realtors said Detroit-area home prices posted the worst decline of any urban area in the nation during the period from July to September period, down 10.5% from the same period a year before.

And a lot of owners who think they have finally found a buyer are seeing the deals fall through because of the uncertain employment situation.

Bone has had at least five signed purchase agreements, but none made it to closing. Two of her buyers experienced layoffs and had to back out. Others just got cold feet.

"We've been as flexible as we can be with them," Bone said.

In the meantime, she's put a new roof on her duplex and has painted the interior to make it more attractive.

"We've been taking on projects that we had hoped would be somebody's else's projects," she said this month.

The sales slump has been especially difficult for people such as John and Linda Bruce, who are paying two mortgages -- one for the home in Grosse Pointe Farms they haven't been able to sell in more than a year, and one on their new, smaller ranch home in St. Clair Shores.

"We were not prepared for what's happened here. ... It has not been easy," John Bruce said this month.

Of course, sellers' pain translates into buyers' gain, said Pat Vredevoogd Combs, a Grand Rapids-area broker who became president of the National Association of Realtors this month.

"Buyers out there have choice," she said. "They can take their time a little bit, as opposed to a crazy, frantic marketplace where they've got to buy the first thing and then maybe not be happy with it."

But that's not much consolation to buyers who haven't been able to sell their old home.

"It was easier finding a home than selling this one," Doreen Badgett of Troy said of her previous home in Southfield, which has been on the market for three months.

Michigan hit especially hard

The slump in sales comes despite low interest rates and an economy that, by national standards at least, is pretty good.

The Michigan market, however, has been hit particularly hard by layoffs in the automotive industry. But the problem of slow house sales is not confined to the state.

Across the nation, a slump in sales of houses and condominiums followed years of rapid price appreciation. Many market-watchers blame today's slump on a price bubble that finally burst.

"A lot of things are overpriced," Sherri Richwine, a broker with Real Estate One in Ann Arbor, said this month. "People are not being realistic. Just because they received a large paper appreciation, they think they should be able to sell it for that. In reality, the gain is not as great as they thought."

Still others said the slump may have been worsened by several years of brisk activity by home builders, who have delivered thousands of new homes onto the market.

With prices plunging, home-building activity, too, has slumped dramatically in recent months, with new residential-building permits in southeast Michigan down 66.2% to 526 in October, compared with 1,557 in October 2005, according to data from the Southeast Michigan Council of Governments.

Real estate goes in a cycle

Some realty agents report signs that the slump may be easing. Gary Severn, a veteran agent in the Grosse Pointe market, said this month that more people are attending open houses and calling to ask about places listed for sale.

But even if agents are hopeful, a recovery hasn't shown up yet in sales figures. For September, sales in Michigan were off more than 14% compared with September 2005.

Declines have been especially sharp in Livingston County, where sales were down 26% in September from a year before, and Monroe County, where sales were off nearly 32% during the month. September was the most recent month for which data were available.

The Detroit Board of Realtors reported sales up 6.6% during September. The city is one of the few areas of the state to show a gain.

Even so, Vredevoogd Combs, a 35-year veteran of the business, said this month that better days are coming.

"We're in a cycle where we've got a lot more houses than we do buyers," she said. "Pretty soon, we're going to be in a cycle where we have a lot more buyers than we do houses. That's kind of the cycle of real estate life."

Article in November 22, 2006 Detroit News

The incredible deflating housing market

Region's home prices fall most, but is rebound near?

Dorothy Bourdet The Detroit News / The Detroit News

First came the sting of massive job and income cuts, making Metro Detroiters nervous about their futures. Right behind were fear and caution, which kept homebuyers on the sidelines and created an oversupply of homes that can sit months, even years, on the market.

Now, comes home price deflation, the worst in the nation, according to a survey released this week by the National Association of Realtors. The median home price in Metro Detroit sank to $154,100 in the third quarter, down 10.5 percent from $172,100 at the same time last year. It was the largest percentage drop of U.S. cities.

"The overall feeling in Michigan is everybody's knees are knocking a little bit," said Nancy Warson, a Livonia Realtor.

While prices are down, at least one top Realtor predicts the market may be ready to rebound.

"We're ready to turn around," said Pat Vredevoogd Combs, National Association of Realtors president and a Grand Rapids Realtor. "What we're seeing, we think, is that it's bottoming out."

The steep decline in home prices can be blamed on big losses in jobs and income in Metro Detroit, said Dana Johnson, chief economist at Comerica Bank.

"Overlaid on top of that fundamental is the fear and uncertainty that pervades this region," he said

Would-be homeseller Brian Kurtz knows that uncertainty well. The financial planner from Troy has dropped the price on his Sterling Heights colonial by $36,600 to $259,900 and is now paying $4,000 per month for two mortgages.

"It's like trying to sell ice cubes to Eskimos," said Kurtz, whose home has been on the market since August 2005.

Warson, with Real Estate One, said buyers are just not out there. One of Warson's clients in South Lyon, who is selling their house for about $500,000, has had only one potential buyer look at it in seven months.

Those kinds of waits are reflected in the state's slumping home sales, which are down 17.2 percent in the third quarter. Those kinds of waits also can quickly force down home prices, as sellers often drastically cut their asking prices so they can snag a buyer.

In a state where the jobless rate has soared above the national average, buyers are wary of getting into long-term financial commitments, Warson said. Current homeowners, such as empty nesters, are also reluctant to move or downsize, fearing they'll take a loss on their home.

"Some are scared about their job, some are scared (because) they don't know where the market is and they would prefer to buy at the very, very bottom, so they're holding out -- and nobody knows where the bottom is," Warson said.

Sellers have to be patient

Home prices are slipping nationally, too, though not as drastically as in Michigan. The median single-family home price in the U.S. was $224,900 in the third quarter, down 1.2 percent from last year when the median price was $227,600.

While the national decline is seen as an expected correction in housing prices that had soared out of control with five years of double-digit increases, the big drop in the Metro Detroit median home prices over the past six months has been unparalleled since 1989, the furthest back data is available.

"We're kind of an oddity out there," said Combs, the Grand Rapids Realtor.

Economists say home sellers will have to be patient as they wait for the local real estate market get upright again.

"It's going to be a while before that fear and uncertainty goes away. We're at least six months away from the time when jobs and income bottom out here in Michigan," Johnson said.

Falling home prices mean people have fewer options when they hit financial rough spots.

Wayne County had the nation's second-highest metro foreclosure rate in October, with one in every 196 households filing for foreclosure, according to RealtyTrac, an online firm that tracks foreclosures.

"When it (the median house price) drops sharply, it leaves people with no equity and when they get into trouble they have no choice but to walk away," Johnson said.

"It's an example of how the distress in the economy ripples from one sector to another."

Agents are getting creative

To jump start the housing market, real estate agents have pulled out all the stops. They've developed individual Web sites for each house, increased commissions for the buyer's agent and added other incentives for buyers.

"We've seen plasma TVs, we've seen $5,000 bonuses, we've seen cars, we've seen airline tickets. We're about as creative as we can get at this point," Warson said. "It's still not driving the market up."

In an average year, real estate broker Rob Scalici closes on about 75 to 100 home sales. Right now, he's got 30 listings and no buyers.

"It's kind of amazing. I'm back to doing things that I haven't done in a long time," said Scalici, a broker with RE/MAX Metropolitan in Utica, who is spending more and more Sundays in open houses hoping to snag a buyer.

Scalici hopes 2007 will be a better year for home sellers.

"You've gotta hope that with the New Year comes renewed spirits," he said.

Combs of the National Association of Realtors is optimistic.

Her open houses have been busier -- just this week she sold two homes in the Grand Rapids area.

"Buyers have been sitting on the sidelines watching," she said. "We're seeing them coming back into the market."

Article in November 18, 2006 Detroit Free Press

Jobs outlook dim for 2 more years
U-M economists predict more losses before recovery

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

November 18, 2006

Michigan will endure at least another year or two of job losses, on top of six straight years of decline, before seeing a recovery in labor markets, University of Michigan economists predicted Friday in their annual Michigan economic forecast.

The ominous prediction confirms what many had long suspected -- that Michigan is going through the longest stretch of job losses since the Great Depression of the 1930s.

Since mid-2000 to the end of this year, the state will have lost 336,000 jobs out of its roughly 5-million person workforce, and it will lose another 33,000 jobs in the next two years, the U-M outlook said. Most of these losses have been in the hard-hit manufacturing sector, particularly the automotive industry.

The losses to come will translate into Michigan's unemployment rate rising from an average of 6.8% this year to 7.5% next year and 7.7% in 2008 -- the highest rates since 1992.

"The Michigan economy is fighting its way through a long stretch of stormy weather, trying to ride out the turbulence generated by the ongoing restructuring among the domestic automakers," said U-M economist George Fulton in remarks prepared for delivery Friday morning in Ann Arbor. The remarks were released to the media Thursday.

"The Michigan labor market will continue to flounder. Dreary as this outlook may be, we do see some improvement developing over its horizon. By the close of 2008, job growth barely nudges into positive territory," he said.

Delivered each year since 1973, the U-M forecast is among the most-respected predictions of Michigan's economic future, widely relied on by government, business and academia for planning investments and mapping strategies.

By predicting no upswing in the state's job market until the end of 2008, the U-M forecasters injected another year of losses into its outlook. A year ago, the U-M economists were predicting Michigan's job slide would end in 2007.

This time, though, Fulton and colleagues Joan Crary and Saul Hymans predicted the state would lose 24,000 jobs during 2007 and another 9,000 during 2008, mainly due to heavy losses in manufacturing.

The state will lose more than 40,000 manufacturing jobs over the course of this year, nearly 30,000 next year and another 24,000 during 2008, they said. The auto industry will account for about 70% of these manufacturing job losses.

"The state economy reflects not simply the fortunes of the auto industry as a whole, but ... the well-being of the traditional domestic producers, or Big Three -- General Motors, Ford and the Chrysler Group," Crary said.

"From 2001 to 2005, the Big Three's market share plummeted 7 percentage points. The situation went from bad to worse this year as soaring gasoline prices had consumers tightening their belts and focusing on fuel economy. It now appears that Big Three market share will plunge by nearly 3 percentage points this year."

There was some good news amid the gloom. Michigan's service sector should add more than 20,000 jobs this year, nearly 13,000 jobs in 2007, and just shy of 17,000 in 2008.

Almost half of these gains will occur in private education and health services, the only major industry to have grown throughout the extended downturn in the Michigan economy.

Article in November 16, 2006 Detroit Free Press

Auction to unload new condos, homes
Bids in 1-day sale start at $30,000

BY ALEJANDRO BODIPO-MEMBA
FREE PRESS BUSINESS WRITER

November 16, 2006

In a dramatic sign of southeast Michigan's lagging housing market, properties with opening bids as low as $30,000 will be offered Sunday in what is believed to be the largest-ever auction of its kind in Michigan.

Neumann Homes, a Chicago-based builder with extensive operations in Michigan, is trying to recoup its investment in the area by conducting a one-day auction of 87 homes, lots and condos in nine communities.

The auction will be at 2 p.m. Sunday in Troy.

Homebuilders including Neumann say Michigan's sagging economy -- with the nation's highest unemployment rate and job cuts at Detroit's automakers -- has saddled them with excess inventories and limited options to make a profit or merely break even.

"Every builder in the U.S. is facing a downturn, and everybody is left with excess inventory," said Laurie Tarver, division president for Neumann Homes in Michigan.

"Then add to that the sluggish economy and lack of job growth in Michigan. The bottom line is, no builder wants to do an auction, because it means you need to get the return quicker than you wanted."

A look at what's for sale

Neumann Homes, one of the nation's largest homebuilders, with operations in Illinois, Colorado and Wisconsin, has built 11,000 homes since 1985.

It is putting 23 single-family homes, 24 condos and 40 building sites up for auction, including luxury homes and condos in Rochester Hills, Clarkston, Highland Township, Lake Orion, South Lyon, Milford, Southfield, Pontiac and Novi.

Minimum opening bids will range from $30,000 to $200,000.

"The advantage of having an auction as a builder is you have the opportunity to sell a lot of property in one day," Tarver said. "For consumers, it's the deal of a lifetime. It's definitely a buyers market."

These developments are among those in the auction:

• Middlesboro at Oakhurst Golf & Country Club, 6855 Oakhurst Ridge Road in Clarkston.

• Oakland Knolls, 44 Londonderry Lane in Rochester Hills.

• Pine Bluff Estates, 2742 Overbrook in Highland Township.

• Fountain View, 1106 Fountain View Circle in South Lyon.

Bids for 21 of the homes, condos and lots will be sold on an absolute basis -- meaning that they will be sold at the highest bid, regardless of the seller's desired minimum bid.

The remaining properties will be sold on reserve, which means the seller has the right to refuse a bid if it doesn't reach a predetermined price.

Successful bidders will be charged a 3% service fee. Bidders must provide a cashier's check, certified check or cash for the minimum amount of the property's listing.

"As far as new product, this is the largest auction of new property in Michigan, to the best of my knowledge," said Bob Roggeveen, president of Auction Services Group, a Chicago-based company that is conducting the Neumann Homes auction.

Some of the proceeds from the auction will go toward paying off third-party lenders, recouping Neumann's initial investment or providing money to reinvest in Michigan.

Other Michigan builders are considering similar auctions.

Jim Babcock, president of the Building Industry Association of Southeastern Michigan and chief executive of the Babcock Building Co. in St. Clair Shores, recently put up for auction homes he built in Monroe.

"It's no secret that new home sales are slowing down and our members are doing all types of things to be creative and move product," he said. "Auctions are becoming more common."

Slump seen as temporary

Taking the unusual step of auctioning off properties is evidence that Michigan's housing economy is among the worst in America. Michigan single-family housing permits -- a proxy for the number of homes builders plan to construct -- declined 35% in September, compared with September 2005.

In metro Detroit, permits were down 45%, according to the Michigan Association of Home Builders. Overall, permits in southeastern Michigan have fallen from 24,359 in 2004 to 7,429 for the first eight months of this year.

But even as developers find it more difficult to sell properties, they say the downturn in the housing market is temporary and Michigan will be on the mend by 2008.

"I think we're right around the bottom of this cycle," said Robert Filka, chief executive officer of the Michigan Association of Home Builders. "It will probably take another 12 to 18 months before things start to pick back up."

Article in November 14, 2006 Detroit News

Homeowners now pay for years of low rates

Dorothy Bourdet / The Detroit News

For Amy and Randy Greenwood, an adjustable-rate mortgage was a way to consolidate bills even with less-than-perfect credit.

A so-called ARM helped Detroiter Amanda Pena realize a dream: a home for her family.

For the Hamiltons, it was a savvy finance management move, given they didn't plan to stay in their Livonia house too long.

The deal worked like this: get lower interest rates on your loan for several years, but risk higher payments after that time is up and your interest rate readjusts.

Time is up for the Greenwoods, Pena and millions of others like them, who planned to refinance before they faced higher rates but couldn't and got hit with sticker shock when the mortgage bill arrived.

"It's going to make it harder. It will take away some extra money that we would like to save," said Amy Greenwood, whose mortgage bill jumped from $1,100 to $1,359 after the interest rate on the loan jumped 3 1/2 percentage points.

Monthly payment hikes could scarcely come at a worse time for many Michigan families who face falling home values, job loss and a stale real estate market.

"We have the combination of (adjustable-rate mortgages) and the combination of a depressed real estate market. I'm seeing people all the time now that I just can't help," said Mark Chessman, a Roseville bankruptcy attorney. "It's just the kiss of death."

Several years ago, when mortgage rates scraped bottom, thousands of Metro Detroiters opted for adjustable-rate loans to buy a home at the initial low rates they offer, as well as to refinance out of other higher-interest mortgages, consolidate and pay off credit card debt, or to take out home equity credit lines for improvement projects.

Now, interest rates on an estimated $500 billion to $800 billion of those loans will readjust in 2007, according to the Mortgage Bankers Association. Freddie Mac estimates that $494 billion will reset this year.

The sometimes staggering increases in housing payments that come with adjustable-rate mortgages are at least partly to blame for a 17 percent, third-quarter jump in foreclosures reported this month by RealtyTrac Inc., an online firm that tracks foreclosures. Year over year, foreclosures are up 43 percent nationally.

"With the volume of these loans -- more than $1 trillion of them due to adjust over the next 15 months -- this is a trend that definitely bears watching," said James J. Saccacio, chief executive officer of RealtyTrac.

Values below what they owe

Median home prices in Metro Detroit dropped 8 percent -- the biggest decline since 1989 -- in the second quarter of this year, compared to the same period last year, according to the National Association of Realtors.

Those falling home prices, coupled with mortgages with no down payments or maxed-out home equity lines of credit, has left stranded many homeowners whose home values now fall below what they owe.

"Home prices are not rising the same as they are across the nation. We haven't had that home explosion like they have in Nevada or Arizona," said Carlo Dall'Olmo, a broker with 1st Metropolitan Mortgage in Farmington Hills.

Many people with adjustable-rate mortgages are now scrambling to get into a fixed rate or sell their home, which can also be difficult, said Akua Ofori-Mensa, who works in the GreenPath Debt Solutions Westland office.

"Because the market has depreciated so much, there's not equity in people's home and you need equity to refinance," Mensa said. "I've seen a lot lately too that people want to sell their house, (but) they can't sell it for what the mortgage value is."

'I worry about it every day'

It's that frightening seesaw of rising costs and lower home equity that has Ken Hamilton worried.

At first, an ARM on his home was a smart move, Hamilton said, enabling his family to save money on a mortgage they didn't plan on keeping long term.

By the time his seven-year ARM begins readjusting in two years on his $225,000 Livonia home, he fears it could be tough to sell since homes are not appreciating enough.

"I worry about it every day," said Hamilton, who plans to put up a "For Sale" sign in the next few weeks.

"If we were smart and watched (interest rates) when they got down to the fours, we should have locked in. But we didn't pay that close of attention," he said. "Hopefully, by the time we do sell in eight to 10 months, it will have turned some for Michigan."

Last month, the Greenwoods saw the monthly payment on their Warren ranch jump from $1,100 to $1,359 as their ARM reset.

Poor credit is preventing the couple from refinancing, but Amy Greenwood said they are managing the bills because they were prepared for a reset when they took the loan.

"We planned on it going up. It wasn't like a big surprise," she said. "I do think that people go out there and get mortgages on their home and then they can't afford it."

Low rates fueled boom

Adjustable-rate mortgages offer a low fixed-interest rate for as little as a month to up to 10 years. After the fixed terms ends, interest rates usually reset to higher rates at yearly intervals, though some reset every six months.

While ARMs have been around for several decades, they enjoyed a boom in popularity in recent years as mortgage rates plummeted, even as home sales stayed strong and home prices steadily rose. Those low rates, shy of 4 percent on some hybrid ARMs, lured many buyers who stretched to buy a pricey home that they otherwise probably couldn't afford.

ARMs now make up 25.03 percent of mortgages, up from 17.8 percent just three years ago, according to the Mortgage Bankers Association.

"Interest rates remain relatively low, but people were turning to these products in many markets because home prices were accelerating faster than their incomes were, so there was this evolution," said Allen Fishbein, director of housing and credit policy at Consumer Federation of America.

ARMs often attracted consumers who went payment shopping and picked their loan based on the lowest monthly payout, said Greg McBride, senior financial analyst at Bankrate.com.

"If you cannot afford the monthly payment on a 30-year fixed-rate mortgage, that's a red flag that you cannot afford that home," he said. "Now that short-term interest rates have really increased ... those same homeowners are now looking at some steep payment increases."

Variations have higher risk

While homeowners with traditional, hybrid ARMs are beginning to feel the pinch of higher mortgage payments, those with relatively new variations, called interest-only and option ARMs, are hurting even more.

Considered two of the riskiest loans, they allow borrowers to pay off only the monthly interest on their mortgage or pick from a series of payments each month.

Products like these -- once used by sophisticated borrowers with plenty of discretionary income -- are now heavily marketed to middle- or low-income borrowers who need low monthly payments.

The lowest possible payment on the option ARM, with a 1 percent interest rate, doesn't even cover interest, and the remaining balance is tacked on to the back of the loan. Over time, borrowers can end up with a larger loan than they originally took out.

"What's being advertised on the TV and radio are these ridiculously low (interest) loans," said mortgage broker Dall'Olmo. "People go in thinking this is what the rates are. Not everybody does explain it properly."

Subprime borrowers at risk

Also particularly vulnerable are home buyers who are considered higher credit risks, who typically can't qualify for the lower interest ARMs. They often are sold so-called subprime mortgages with higher rates and more frequent adjustments.

Amanda Pena, a Detroit single mother of three, is one of those. She filed for bankruptcy after the monthly payment on the two-year ARM for her $112,000 house readjusted from 7.5 percent to 10 percent in October, pushing her payment up $180 from $640 to $820.

"When I tried to (refinance), I had no equity in the house. They told me I couldn't refinance, so I was stuck," she said. "That's what pushed me to file for bankruptcy. I already knew it was going to be hard to keep up with the payments."

There's legitimate concern for subprime borrowers in households that have low to middle income who have gravitated toward these loans because they aren't in a position to handle a $300 per month payment increase, McBride said.

Watching the Fed

In 2004 and 2005, 7.7 million or $1.88 trillion in adjustable-rate loans were taken out. Of those, about $300 billion are at risk of defaulting as they reset over the next five years, according to Chris Cagan, economist with First American Real Estate Solutions.

An estimated $600 billion to $700 billion of adjustable-rate mortgages will be refinanced before they're due to reset in 2007, according to the Mortgage Bankers Association.

Some are optimistic that borrowers have seen the last of interest rate hikes by the Federal Reserve, at least for a while.

"We think they're going to hold rates steady at least for the next year and if they do change rates, they're likely to lower them instead of raise them," said Mike Fratantoni, senior economist with the Mortgage Bankers Association.

That's good news for borrowers like Ken Hamilton, whose mortgages won't reset for another year or two. If rates go down, it could even mean lower monthly payments when his loan rate adjusts.

But for now, McBride said, borrowers should do their homework and use caution when considering an ARM.

"They're like steak knives," he said. "You use it the right way, it's a great tool; you use it the wrong way and you can get hurt pretty bad."

Article in November 5, 2006 Detroit Free Press

KENNETH HARNEY: Web site's property valuations questioned

November 5, 2006

WASHINGTON -- Have you ever checked out the satellite photos and market value estimates of homes in your neighborhood on Zillow.com -- the Internet real estate site that offers "free, instant valuations and data for 67 million-plus homes"?

Zillow was launched with major media fanfare last February, backed with a reported $57 million in venture capital. It is one of the most popular real estate sites on the Web -- visited millions of times a month by sellers, buyers, agents, lenders and homeowners.

But Zillow is coming under harsh scrutiny. In a complaint filed Oct. 25 with the Federal Trade Commission, the National Community Reinvestment Coalition (NCRC) charged that Zillow knowingly deceives the public by presenting its property estimates as accurate, whereas they are frequently far off the mark.

The nonprofit coalition, which is composed of housing and economic justice organizations around the country, says its own audit of Zillow's accuracy documented that its valuations are within 10% of actual market value "less than one-third of the time."

The allegedly erroneous estimates are especially harmful in low- and moderate-income and minority neighborhoods, according to the complaint.

"While overvaluations were prevalent in predominantly white areas, undervaluations were more frequent in communities that were predominantly African American or Latino by census tract," the complaint charged.

That alleged disparity, in turn, has opened the door to a variety of deceptive and predatory real estate practices in those neighborhoods.

In a prepared statement, Zillow called the coalition's complaint "groundless."

"As we say consistently and prominently on our Web site, Zillow is a free research tool for consumers, and Zestimates are designed to be a starting point for consumers who want to learn about the value of houses. We make every effort to explain on our site the role of Zestimates as a research tool, as well as to clearly display our rates of accuracy for every area we cover."

San Diego appraiser Vicky Cassens Zillioux says that "valuing a property for a financial decision is not a game -- and should not be treated lightly by the consumer, lender or the vendor supplying that value." She notes that appraisers are held to high standards of accuracy and legal liability by lenders and regulators, and "a similar level of accuracy should be expected by the consumer at Zillow.com."

Article in November 3, 2006 Wall Street Journal

The New Word in Home Sales: 'Canceled'

Buyers Back Out of Deals
In Record Numbers;
A $30,000 Deposit, Lost

By JUNE FLETCHER and RUTH SIMON
November 3, 2006

A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.

With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. At a semiannual housing forecast conference last week in Washington, D.C., economists reported that contract-cancellation rates for big builders were running around 40% -- about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.

Some of the cancellations are by people who signed new-home contracts at one price months ago, haven't yet closed, and are now stunned to see the builder drastically cutting prices on identical properties. Some are by speculators caught short by other investments they can't unload. And some are by people trapped in a chain reaction: They can't sell their old home -- or the buyer has canceled the contract -- so they are being forced to cancel the deal on a new house they are buying somewhere else.

"There are a whole lot of people running from contracts," says Alexandria, Va., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.

Even though it may mean losing a deposit that could run tens of thousands of dollars -- deposits typically range from 1% to 5% of the purchase price -- many buyers are deciding that is less onerous than the alternative. With median new-home prices already 9.7% below last year's levels, according to the U.S. Commerce Department, bailing out now may be less painful than committing to an expensive, and possibly depreciating, investment.

It's a far cry from the home-flipping exuberance of the past few years, when rising home values fueled a buy-and-sell mentality among millions of homeowners, and trading up became a staple of reality TV and home-improvement shows.

New-home builders are taking a big hit from record numbers of contract cancellations, or "kickouts." Fort Worth, Texas-based D.R. Horton Inc., the nation's biggest developer, says its cancellation rate is currently 40%, compared with 29% a year ago. Meritage Homes Corp., in Scottsdale, Ariz., is reporting a 37% kickout rate, compared with 21% a year ago. And Standard Pacific Corp. says that 50% of its contracts fell through in the third quarter of this year, compared with 18% for the same period last year. The Irvine, Calif.-based developer built 11,400 homes across the country last year. Among its current projects: Glenmeadow, a gated community in Simi Valley, Calif., where three- and four-bedroom homes range from $1.1 million to $1.3 million.

Caught Between Two Mortgages

Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.

Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. "The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change."

Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law's illness scotched the planned move. "My exit strategy was if they didn't move into it, we could sell it or rent it," Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.

A sinking home appraisal quashed the deal for retirees Denis and Michael Budge. The couple put their two-bedroom house in Carson City, Nev., on the market a little more than a year ago at $495,000, so they could move to another home they had already bought in Waldport, Ore. After some nail-biting months with few showings and no offers, they finally landed a buyer, who signed a contract in June for $425,000.

Rising Interest Rates

But during the escrow period, as prices in their area continued to slide, the appraisal came in -- at $395,000. The Budges were still willing to sell, even at that greatly reduced price, but the buyer backed out the day before the closing. (Through his agent, he declined to comment.) The Budges pocketed the $1,000 deposit, of course, but now they are stuck with two mortgages -- a hardship on their fixed incomes. "We thought we were going to relax and enjoy our retirement," says Ms. Budge. "Not any more."

Kickouts were high nationwide in the late '80s, and in California and New England in the early '90s, spurred by massive job losses. But until now there's never been a period where cancellations have spiked in the absence of a recession, according to Amy Crews Cutts, deputy chief economist at Freddie Mac. Ms. Cutts says the current jitters are largely a result of investors fleeing the housing market in the last few months, which "slammed [it] into reverse," and consumers' fears that the bubble had burst. Rising interest rates earlier this year also gave buyers who hadn't yet closed on their homes cold feet. The result: a huge backlog of unsold homes, which could further depress prices.

But mortgage rates have fallen recently, and if they stay below 6.5%, Ms. Cutts expects that buyers will regain their confidence by late spring, causing cancellations to ease up. Vienna, Va., housing economist Thomas Lawler agrees, but says builders must continue to cut their production and sell off their inventory so supply and demand can get back in balance. "Builders need to take a bullet," he says.

Buyer's remorse does have legal consequences, but the laws vary from state to state and depend on how the purchase contract was written. Usually, a buyer who defaults will have to give up the "good faith" or "earnest money" deposit that was made when the contract was accepted. But typically there is also some wiggle room written into contracts that allows buyers to cancel without penalty -- for instance, if they can't get financing, if the home inspection uncovers defects that the seller won't correct, or if the seller doesn't make certain disclosures. Just changing your mind, however, isn't a valid excuse to cancel. A court could find that a buyer who got cold feet is in breach of contract and liable for the seller's expenses, plus damages -- or could even force the sale.

Of course, it is better not to wind up in court. To keep deals from falling apart, builders are offering everything from free vacations and cars to help with closing costs and mortgage-rate buy-downs -- and they are cutting prices, too. "They're hungry," says Gopal Ahluwalia, director of research at the National Association of Home Builders, the organization that sponsored last week's forecast conference.

Upgrades Required

Most of these incentives are dangled to attract new customers. But as the market has cooled and kickout rates have risen, nervous builders have also been quietly sweetening the pot for buyers they have already snagged but whose contracts haven't yet closed -- just to keep them from bailing out of the deal. Some are even offering to drop the selling price after contracts have been signed.

Two years ago, Rosemary and Paul Owen, both federal employees, signed a $350,000 contract on a three-bedroom condo in Cape Canaveral, Fla., that was yet to be built. Since they knew it would take a long time for the building to be completed -- and the housing market was rapidly rising -- they took their time getting their old house in West Melbourne, Fla., ready for sale. By the time they were ready to sell their three-bedroom home this January, buyers weren't biting. Though they lowered their asking price to $359,000 from $439,000, only 18 people looked at their home over a 10-month period, and no one made an offer.

So they went to the builder in Cape Canaveral to get out of the deal and to get back the $22,000 they had paid for a deposit and upgrades. He wouldn't allow that, but he did offer to lower the price of the condo by $21,000 to $329,000 -- the amount he was asking new buyers to pay for a unit that was identical to the one the Owens had purchased two years ago. He also extended the deadline for closing until the end of November. The Owens haven't decided whether they will walk away from their deposit if they can't sell their old home by then. "We don't need two places," says Ms. Owen.

Meanwhile, builders' willingness to lard up their incentives is putting added pressure on sellers of existing homes to do the same. Many are finding it necessary to add thousands of dollars in upgrades to compete with what builders are giving away. Jim Parker, an exclusive buyer's agent in Atlanta, says that in the last quarter, three out of the five buyers he's been working with have bailed out of a contract, while no one canceled during the same period a year ago. "Before, if something was not perfect, they'd buy it anyway. Now they won't," Mr. Parker says. Buyers are also demanding more upgrades. "They're asking for everything, right down to the flat-screen television," he says. "They're comparing houses to a brand-new house, and they expect the house to be updated with new paint and carpeting."

Since most people who are buying are also selling -- seven out of 10 households already own homes -- some are finding themselves of two minds when it comes to kickouts. Glenn Nudell, a shipping executive, recently got $115,000 in concessions, including help with closing costs and fix-up money, when he bought a 12-year-old five-bedroom home in Skillman, N.J., for almost $1.1 million. If the seller hadn't agreed, he says, "I'd have backed away." But then he had to sell his eight-year-old, four-bedroom home in Princeton, N.J. He made sure it was as polished as a builder's model, with new wood floors and carpeting, new cabinets and even a newly finished basement -- but he couldn't sell it until he had knocked $70,000 off of his original $630,000 asking price. Is he concerned that the buyer of his house might back away from the deal before it closes next month? "Of course," he says.

Article In October 27, 2006 Wall Street Journal

Housing Decline
Sparks Slowdown
In Construction
Store, Mall Demand Drops
As Fewer Homes Are Built;
Weighing Economic Risks

By ALEX FRANGOS

October 27, 2006

The unexpectedly rapid decline of the nation's housing market will mean an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.

"Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster," says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry "no longer has single-family housing to bolster total construction."

The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs. Local governments' ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well.

The McGraw-Hill forecast comes on the heels of a report yesterday by the Census Bureau showing that home builders have had to slash prices to sell homes. Although new-home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 from $240,400 a year earlier. That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference yesterday in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Mr. Seiders blames a confluence of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders.

In the second quarter of 2006, the annual rate of single-family starts fell 41.2% to 1.53 million, while "permits are in free fall," Mr. Seiders says.

To be sure, prices still remain higher than several years ago and many consumers maintain hefty amounts of equity in their properties. Moreover, mortgage rates remain near historical lows and prices remain stable in many markets. Yet the latest news has prompted some economists to question whether the construction industry will become a drag on economic growth or whether the worst has already been felt.

Yesterday, former Federal Reserve Chairman Alan Greenspan said he saw "early signs of stabilization" in the housing market. Mr. Greenspan noted in a speech to the Commercial Finance Association that a weekly index of applications for home-purchase mortgages, compiled by the Mortgage Bankers Association, has "flattened" at relatively high levels. The index plunged in the second half of 2005 and early this year, but lately has been steadier. It is currently 18% below the year-ago level.

"We've already had the hard landing," Angelo Mozilo, chief executive officer of Countrywide Financial Corp., the nation's largest home-mortgage lender, said in a conference call this week. Mr. Mozilo said he expects the mortgage market to "tread water" in 2007. "In 2008," he added, "we'll have one hell of a year for people who remain in the industry" as demand rebounds.

U.S. home prices rose an average of 58% in the five years ended Dec. 31, according to an index produced by the Office of Federal Housing Enterprise Oversight. In some cities, prices more than doubled in that period. Over the past year or so, house prices have declined moderately in many areas -- including Massachusetts, the Washington, D.C., area and parts of California, Florida and Arizona -- but they remain far above their levels of a few years back.

Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers' ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market.

"We're not out of the woods yet," says Peter Kretzmer, a senior economist at Bank of America in New York.

Mr. Murray at McGraw-Hill Construction concurs. Just weeks ago, he was figuring there would still be growth next year. "We thought the correction [in the housing market] would be, in the words of Fed chairman, 'orderly,' " he says. But recent data have shown it is "not as orderly as what people thought."

But the decline won't be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew.

The link between retail construction and home building is strong. "When there's a new neighborhood, there's a new grocery store and pizza parlor in a small shopping center," says James Haughey, director of Research and Analytics at Reed Construction Data, a Norcross, Ga., publisher of building information and a unit of Reed Elsevier Inc. He doesn't see retail falling off right away, however, as retailers are still catching up to consumer growth. "It will be a delayed impact because the pipeline of shopping centers is so full," Mr. Haughey says.

The continued rapid construction of a wide range of other commercial projects -- hospitals, schools, offices, hotels and factories -- will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.

Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill's numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August.

The fallout is being felt at some of the nation's largest home-building companies, which are downsizing staffs. Pulte Homes Inc. of Bloomfield Hills, Mich., said yesterday it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. The cuts have been made throughout the company and across the country. "We've taken these measures in response to lower housing demand, which has resulted in a reduction in construction volumes," Pulte spokesman Mark Marymee said.

Centex Corp., a large builder based in Dallas, said this week that its salaried work force has been reduced by about 10% since April 1 to around 6,400 employees.

In the Phoenix area, construction accounts for 10% of salaried jobs, "and they are pretty good-paying jobs," says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University. He sees the slowdown in the home-building sector being offset somewhat by strength in health care, schools, convention centers and highways. He cautions, however, that local governments that rely heavily on fees garnered from home builders could face fiscal crises. Several municipalities in his area, he says, are considering instituting or augmenting fees on commercial developers to make up for the projected shortfall.

Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. Though McGraw-Hill predicts no growth in hotel spending, others think the increase is likely to continue in 2007. "The rebound in [hotel] construction is everywhere," says Bjorn Hanson, head of the hospitality-and-leisure practice for PricewaterhouseCoopers LLP.

About 70% to 80% of the hotels, says real-estate consultant Patrick Ford, are popping up near freeway exits with limited meeting spaces and food service. The area around Dulles International Airport in Virginia is adding 22 hotels, most in that mold, according to Mr. Ford, president of Lodging Econometrics in Portsmouth, N.H.

Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol trade group, says there are more than a "couple hundred" ethanol plants in development, with 46 under construction.

The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. Office-vacancy rates nationally hit 13.5% in the third quarter, the lowest since the third quarter of 2001, says Sam Chandan, chief economist at Reis Inc., a New York-based research firm. And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.

Article In October 26, 2006 Wall Street Journal

Home Prices Seen Dropping Through 2007

By JUNE FLETCHER

October 26, 2006

Average home prices are headed down over the next few quarters, according several leading housing economists, and growth isn't expected to resume until at least 2008.

The predictions were made on Wednesday at the National Association of Home Builders 2006 Fall Construction Forecast Conference, held in Washington. Builders, lenders, product manufacturers and others attend the semiannual conference to learn about economic trends in residential home building.

The forecast comes as other bodies have released dour news about the housing market. Median single-family home prices are already falling. The U.S. Commerce Department reported today that the median price of new homes fell to $217,100 from $240,400 a year earlier, the lowest price in two years and biggest year-over-year drop since December 1970.

That follows a report on Wednesday by the National Association of Realtors that showed the median price of previously owned homes fell 2.2% to $220,000 during the month, a record drop. Meanwhile, the Federal Reserve decided not to change the federal funds rate, the interest rate on overnight loans between banks, from 5.25%, citing the "cooling" housing sector. Although purchase loans are only indirectly affected by this rate, it does have a direct bearing on home equity lines of credit.

At the forecast conference, David Seiders, chief economist of the National Association of Home Builders, predicted that average prices of single-family homes -- up 10.1% in the second quarter from a year earlier -- will stall in the second quarter of 2007, and then drop 1% in the third quarter and 0.5% in the fourth quarter, before recovering slightly in 2008. It is the first time that the trade association has ever predicted a price decline. Mr. Seiders pegged his forecast to quarterly changes he expects will occur in the Office of Federal Housing Enterprise Oversight's Housing Price Index, which has never showed a year-to-year decline in home prices.

Mr. Seiders blamed a confluence of factors for the anticipated decline, including overbuilding, lack of affordability and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders. In the second quarter of 2006, the annual rate of single-family starts fell 41% to 1.53 million, while "permits are in free-fall," Mr. Seiders said. Although he anticipated a correction at the last semiannual meeting of the forecast conference, "it happened a lot sooner than I expected," he said.

Other economists at the semiannual conference were more pessimistic. David Berson, chief economist at Fannie Mae, said that average home prices could fall 2% to 3% by the middle of next year and not rise until 2009. "Prices have gone out of whack with income growth," he said.

Mark Zandi, chief economist of Moody's Economy.com, expects prices will fall between 2% and 4% by the middle of next year, once sellers finally accept that the boom is over. Still, he doesn't believe that a housing crash is imminent. "Corrections devolve into crashes when bankers dump properties," he said. According to Mr. Zandi, that scenario is less likely to happen today than it was in the '80s and '90s, since most homeowners have a sizable amount of equity in their homes and are unlikely to default on their loans.

Article in October 26, 2006 Wall Street Journal

Home Prices Keep Sliding; Buyers Sit Tight

August and September Declines
Were Largest in at Least 38 Years;
Yanking a Listing in Naples, Fla.

By JAMES R. HAGERTY
October 26, 2006

The air continues to seep out of the U.S. housing market, according to the latest data, and some economists are warning that prices will keep declining through much of 2007.

The National Association of Realtors yesterday reported the biggest drop in home prices since the trade group began compiling price data in 1968. Specifically, the association said the median price for home sales completed in September was $220,000, down 2.2% from a year earlier. That matched a revised 2.2% decline in August. In addition to being the largest price drops in at least 38 years, the back-to-back declines are the first time median home prices have fallen since 1995.

Other data gathered by The Wall Street Journal show large inventories of unsold homes and declining price trends in most major metropolitan areas.

Housing is still contracting," says Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. "We haven't yet found the bottom." Mr. Miller doesn't expect house prices to resume their usual rising trend until 2008.

The latest report is likely to encourage many potential buyers to hold off in the hope of further price declines. "There's no rush," says Robert Cook, a procurement manager living in Whitehall, Pa., who is looking to buy a larger home for his family in Pennsylvania's Lehigh Valley.

Rather than slash their prices, some sellers are taking homes off the market until they see stronger demand. Audrey Heckaman, a pharmaceutical sales representative in Cleveland, bought a new condo in a golfing community in Naples, Fla., in 2004 for $221,000. Early this year, she put it on the market for $429,000. But she found that too many other units in the same development were on the market. After cutting her price to $384,000, she yanked the home from the market in June and found renters for part of the year. In the long run, she figures, demand from retiring baby boomers will drive prices back up.

For those who want to buy now, sellers are dangling lots of incentives. A developer in Dadeland, Fla., near Miami, is offering $5,000 of furniture as an inducement for buyers of new condominiums, says Ronald A. Shuffield, president of the brokerage firm Esslinger-Wooten-Maxwell Inc. Other developers offer to pay some of the fees and other costs usually borne by home purchasers.

Some people who are forced to sell quickly are suffering huge losses. At an auction in Naples last weekend, the highest bid for a three-bedroom lakefront house was $440,000, including commissions and auction fees. The house had sold in July 2005 for $690,000.

Despite the recent drop-off, house prices remain far above the levels of five years ago, and they continue to rise in some areas, including Seattle, Houston and Raleigh, N.C. But they are falling sharply in other places. In Massachusetts, the median price for single-family homes in September was down 8.3% from a year before, according to Warren Group Inc., a publisher and data collector in Boston. In Phoenix, the median price dropped 4.8% in September, the local Realtors association reported.

In some areas, prices are only just beginning to fall back toward realistic levels, says Thomas Lawler, a housing economist in Vienna, Va. He believes that prices could fall more than 10% from their peak levels in markets such as Sacramento, Calif.; San Diego; Las Vegas; Reno, Nev.; Phoenix and parts of northern Virginia and Florida.

Nationwide, sales of previously occupied homes in September were at a seasonally adjusted annual rate of 6.2 million, down 1.9% from August and 14% from a year earlier, the Realtors group reported.

In a mildly positive sign for home sellers, the number of homes listed for sale at the end of September declined 2.4% from a month earlier to 3.75 million. But that was smaller than the usual decline in September, when the resumption of school and the approach of the holidays typically begin to reduce the number of for-sale signs. Over the past decade, inventories of home sales have declined an average of 3.6% in September from the previous month.

Inventories in September were up about 35% from a year earlier. A surge in inventories, fueled partly by investors rushing for the exits, began chilling the housing market in mid-2005 after a five-year boom that more than doubled prices in many areas.

Despite the spreading weakness in house prices, few experts expect anything approaching a collapse. The economy continues to expand, though at a slower rate, and a recent drop in interest rates helps make mortgage costs more affordable.

To gauge residential real-estate prospects for 27 major metro areas, The Wall Street Journal gathered data on inventories of homes for sale at the end of the second quarter from a variety of local sources; pricing trends based on surveys of real-estate agents by Daniel Oppenheim, an analyst at Banc of America Securities in New York, a unit of Bank of America Corp.; and data on late mortgage payments and job-creation prospects from Moody's Economy.com, a research firm in West Chester, Pa. Employment trends tend to drive demand for housing.

Metropolitan areas with large increases in homes on the market and weak job-growth projections include Detroit, New York and Los Angeles. Inventories have more than doubled from a year earlier in the Miami, Orlando, Tampa and Phoenix metro areas, but strong job and population growth should help to soak up excess supply in the next few years.

Even within metro areas, price trends vary considerably depending on neighborhoods and types of housing. In northern New Jersey, for instance, prices for homes below about $400,000 may start rising again slightly by next spring if interest rates remain around current levels, says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. At that price level, "there's virtually zero construction," he says. But he says there is such a glut of luxury housing in the area that prices of such homes won't recover before 2008.

Tom Doyle, an agent at Naples Realty Services who compiles market data on his Web site (www.naplesinsider.com), estimates that prices for typical homes in the area are down 15% to 20% from their peak a year ago. Inventory has doubled during that time, but many of the homes on the market are priced so high that they have "only a lottery's chance of selling," he says. Looking ahead to this winter's selling season, Mr. Doyle says he expects prices to be flat to lower because of the large supply of homes for sale.

Seattle has been one of the strongest markets in recent months but is showing signs of losing some steam as inventories of unsold homes rise. In 17 counties of western and central Washington State covered by the Northwest Multiple Listing Service, the median price in September was up 9.4% from a year earlier, the first single-digit increase in two years.

Mike Skahen, owner of real-estate brokerage Lake & Co. in Seattle, says inventory is still lean in good neighborhoods near the area's biggest employers. But the overall market is slowing to a more normal pace as "buyers are feeling they can be more selective."

Houston's market is benefiting from job growth at energy and technology companies and draws newcomers because of its low home prices. The median price in the second quarter was $152,700, compared with a national median of $227,500, according to the National Association of Realtors.

In North Carolina, Charlotte, Raleigh and some other areas have been strong lately as moderate weather and relatively low housing costs attract employers and retirees. Pat Riley, president of Allen Tate Realtors in Charlotte, has noticed increasing numbers of people moving to North Carolina from Florida to flee congestion and high housing and insurance costs. One hitch: Some people moving to Charlotte are having trouble selling their homes elsewhere and so are delaying purchases.

The median price of new and previously occupied homes sold in the eight-county Charlotte region was $182,000 in the third quarter, up 6% from a year earlier, according to Market Opportunity Research Enterprises, a research firm in Rocky Mount, N.C. But the Charlotte market may be starting to cool a bit. The Charlotte Regional Realtors Association reported that home sales in September slipped 2% from a year earlier, while the average price edged down 0.2%.

The California Association of Realtors last week forecast that the median home price in the state will slip 2% to $550,000 in 2007, after rising 7% in 2006 and 16% in 2005. That would mark the first California-wide decline since 1996. California's last house-price slump lasted from 1992 through 1996.

Leslie Appleton-Young, the California Realtors' chief economist, says she doesn't expect the current downturn to be as severe as the one in the 1990s because she thinks the job market will be healthier this time. Many people don't need to sell and will withdraw their homes from the market until demand recovers, she says. Still, she adds, some investors who bought near the top and took on too much debt "are going to get into trouble."