Homeowners down in the dumps
Housing slump catches many off guard, puts pinch on other areas of economy, including jobs.
James R. Hagerty and Michael Corkery / Wall Street Journal
HERNDON, Va. -- For years, real-estate brokers and home builders promised the soaring property market eventually would glide to a soft landing. These optimists predicted home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5 percent or 6 percent a year.
However, it isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago. It's too early to say how hard the landing will be, but at a minimum it will be bumpy for many people who need to sell homes. And the economy as a whole, buoyed in recent years by the housing frenzy, could suffer.
The pain homeowners and home builders are feeling follows a raging national house party. As Americans soured on the stock market after the tech bubble burst in 2000, they poured money into real estate, spurred on by the lowest interest rates in four decades and looser lending standards. Surging demand created home shortages in California, Florida and the Northeast. Over the five years ending Dec. 31, average U.S. home prices jumped by 58 percent, according to a federal housing index.
But, mortgage rates began rising, and surging inventories of homes for sale finally caught up with demand. Though economists had been predicting a slowdown in housing for years, many homeowners and builders were surprised by how fast the market changed.
"It's just like somebody flipped a switch," says Lynn Gardner, a real-estate auctioneer who works in Northern Virginia.
A never-before-seen trend
"It would be difficult to characterize the position of home builders as other than in a hard landing," says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported this week that net income fell 19 percent in the third quarter ended July 31.
In his 40 years as a home builder, Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or ... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."
In much of the country, including Michigan, property markets began cooling rapidly in the second half of last year. Home builders were still turning out houses at a rapid clip, and the surge of new and previously occupied homes on the market convinced buyers there was no need to hurry. Over the past year, the number of previously occupied homes listed for sale nationwide has risen nearly 40 percent. In some metropolitan areas, including Orlando and Phoenix, the supply has quadrupled.
Homeowners in a bind
Allen Sinai, chief economist at Decision Economics Inc., a research firm, contends that housing is poised for something "harder than a soft landing but softer than a hard landing." The weaker market will hurt the economy by eliminating jobs in construction and other housing-related fields and by reducing the ability of consumers to finance spending by borrowing against their home equity.
Sinai predicts these factors could shave as much as a percentage point off economic growth over the next year or so. Taking that into account, he expects the economy to grow at a relatively sluggish annual rate of 2.5 percent to 2.75 percent in 2007, compared with 2.5 percent in this year's second quarter and 5.6 percent in the first quarter.
For some homeowners who bought as the market was peaking last year, the downturn is already creating a financial pinch.
In April 2005, Jennifer Bloom paid about $229,000 for a condominium in Yarmouth Port on Massachusetts's Cape Cod, where her son planned to live.
After his plans changed, Bloom, a software specialist for a computer company, decided early this year to sell the condo. She initially listed it at $229,000, and then gradually shaved the price to $199,000 as the market weakened. Earlier this month, she gave up on finding a buyer at a price she could bear to accept.
Instead, she is renting out the condo for $1,000 a month, which she says is more than $200 below her monthly costs for mortgage payments, insurance, taxes and other items.
She says she intends to hold off on selling it until the market improves.
Housing slump catches many off guard, puts pinch on other areas of economy, including jobs.
James R. Hagerty and Michael Corkery / Wall Street Journal
HERNDON, Va. -- For years, real-estate brokers and home builders promised the soaring property market eventually would glide to a soft landing. These optimists predicted home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5 percent or 6 percent a year.
However, it isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago. It's too early to say how hard the landing will be, but at a minimum it will be bumpy for many people who need to sell homes. And the economy as a whole, buoyed in recent years by the housing frenzy, could suffer.
The pain homeowners and home builders are feeling follows a raging national house party. As Americans soured on the stock market after the tech bubble burst in 2000, they poured money into real estate, spurred on by the lowest interest rates in four decades and looser lending standards. Surging demand created home shortages in California, Florida and the Northeast. Over the five years ending Dec. 31, average U.S. home prices jumped by 58 percent, according to a federal housing index.
But, mortgage rates began rising, and surging inventories of homes for sale finally caught up with demand. Though economists had been predicting a slowdown in housing for years, many homeowners and builders were surprised by how fast the market changed.
"It's just like somebody flipped a switch," says Lynn Gardner, a real-estate auctioneer who works in Northern Virginia.
A never-before-seen trend
"It would be difficult to characterize the position of home builders as other than in a hard landing," says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported this week that net income fell 19 percent in the third quarter ended July 31.
In his 40 years as a home builder, Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or ... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."
In much of the country, including Michigan, property markets began cooling rapidly in the second half of last year. Home builders were still turning out houses at a rapid clip, and the surge of new and previously occupied homes on the market convinced buyers there was no need to hurry. Over the past year, the number of previously occupied homes listed for sale nationwide has risen nearly 40 percent. In some metropolitan areas, including Orlando and Phoenix, the supply has quadrupled.
Homeowners in a bind
Allen Sinai, chief economist at Decision Economics Inc., a research firm, contends that housing is poised for something "harder than a soft landing but softer than a hard landing." The weaker market will hurt the economy by eliminating jobs in construction and other housing-related fields and by reducing the ability of consumers to finance spending by borrowing against their home equity.
Sinai predicts these factors could shave as much as a percentage point off economic growth over the next year or so. Taking that into account, he expects the economy to grow at a relatively sluggish annual rate of 2.5 percent to 2.75 percent in 2007, compared with 2.5 percent in this year's second quarter and 5.6 percent in the first quarter.
For some homeowners who bought as the market was peaking last year, the downturn is already creating a financial pinch.
In April 2005, Jennifer Bloom paid about $229,000 for a condominium in Yarmouth Port on Massachusetts's Cape Cod, where her son planned to live.
After his plans changed, Bloom, a software specialist for a computer company, decided early this year to sell the condo. She initially listed it at $229,000, and then gradually shaved the price to $199,000 as the market weakened. Earlier this month, she gave up on finding a buyer at a price she could bear to accept.
Instead, she is renting out the condo for $1,000 a month, which she says is more than $200 below her monthly costs for mortgage payments, insurance, taxes and other items.
She says she intends to hold off on selling it until the market improves.
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