Article in September 28, 2006 Wall Street Journal

Pricing Your Home Gets Trickier

Sellers Test Different Strategies
As Houses Languish on Market;
How to Trigger a Bidding War

By RUTH SIMON
September 28, 2006

As the housing market cools, one of the hardest decisions facing home sellers is how to price their properties.

Traditionally, brokers have set listing prices by reviewing how much comparable homes sold for in a neighborhood. Now, with prices edging lower in many places and the number of homes on the market climbing, checking comparable sales is becoming less useful. At the same time, many would-be buyers are sitting on the sidelines, waiting to see how far prices will fall. Bigger inventories of unsold homes also are making it harder for sellers to figure out how to make their house stand out amid the competition.

Some brokers are telling customers they need to underprice the competition -- even if they think their home is more attractive. Sharon Baum, a senior vice president with the Corcoran Group in New York, recently listed a two-bedroom, two-bathroom apartment for $3.7 million. That was $100,000 less than the asking price for a similar unit five floors below, even though apartments on higher floors typically carry bigger price tags. "As buyers have more choices, you've got to make your apartment stand out," she says.

Sellers are also being told to cut prices aggressively if their house isn't moving -- or risk chasing the market downward. If a home doesn't get any showings in 21 days or gets 10 showings but no offers, Ned Redpath, president and owner of Coldwell Banker Redpath & Co. in Hanover, N.H., often advises the seller to slice the asking price by 10%. "We don't like to see $2,000 or $5,000 price adjustments," he says. "We want to see a real whack" that attracts attention.

Builders of new homes also are tinkering with their pricing formulas to generate sales. Mid-Atlantic Builders in Rockville, Md. is offering to adjust the sales price downward up to 45 days before closing if the price on one of its similar homes declines. Waterford Development Corp. will have homes in its Woodland Pond at Manchester development in New Hampshire reappraised two years after closing. If the price drops, the company says it will write the buyer a check for up to 15% of the original sales price, not including the value of any optional upgrades.

Even in relatively strong markets, brokers are paying closer attention to price trends. Wallace Perry, president of Coldwell Banker United, Realtors, Carolinas region, says he has begun checking multiple-listing service data every week or two instead of once a quarter to see how recent sales compare with deals that closed three and six months ago. "Things can change...very quickly," he says.

The renewed emphasis on pricing represents a dramatic turnabout from the heady days of the housing boom, which peaked in the middle of last year. Bidding wars were common and, in many markets, homeowners simply looked at the last sale and asked for more.

That's all changed. The National Association of Realtors said this week that the median sales price of existing, or previously owned, homes fell 1.7% to $225,000 in August from a year earlier, the first such drop in 11 years. There's now a 7.5-month supply of existing homes on the market, the most since April 1993.

With so many properties vying for attention, sellers are also looking for creative ways to catch the eye of would-be buyers and their brokers. Some sellers are offering to pay closing costs or provide other incentives. When their 3,500-square-foot carriage house in Exton, Pa., failed to sell this spring, the owners dropped the asking price twice, to $449,000 from $479,000, says Beth Koser, an agent with Prudential Fox & Roach, Realtors. When that didn't do the trick, the couple agreed to offer $10,000 toward closing costs to any buyer or agent who attended an open house within a two-day period. The home sold a few weeks later for $430,000. "The incentive created a sense of urgency," says Ms. Koser. Buyers "saw that the seller was willing to negotiate."

Other brokers are using incentives to counter competition from new home builders. In Tampa Bay, Fla., Craig Beggins, president of Century 21 Beggins Enterprises, recently put together a list of 16 incentives homeowners can offer, from paying the mortgage for several months, to outfitting a media room with a big-screen TV, to picking up the cost of day care for some period.

Another approach is a personal plea. Traci Smith, president of Century 21 Smith & Associates in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing, such as the fact that the kids on the block trick-or-treat at Halloween together. During the height of the housing boom, some brokers were encouraging the same type of personal notes -- but from buyers eager to get their bid accepted.

Some brokers are trying to trigger bidding wars by setting an asking price sure to attract attention. Romeo Aurelio Jr., sales manager for Century 21 Hartford Properties, recently listed a small one-bedroom, one-bath fixer-upper in San Francisco's fashionable Noe Valley neighborhood for $650,000, even though he figured the home would sell for $100,000 above that. "If we priced it at $750,000, it was going to sit," Mr. Aurelio explains. "We marketed it aggressively at $650,000 and it generated 20 offers." The house sold this week for $845,000.

And with more buyers hunting houses online, selling strategies are adapting to the new technology. Michael Gallagher, a financial-services executive, initially listed his four-bedroom house in Shawnee, Kan., at $274,500. When the listing expired, Mr. Gallagher's new broker suggested that he boost the price to $275,000. Within weeks, the home sold for $271,000, $36,000 more than the best previous offer.

The explanation? Buyers who use the Internet typically search in increments of $5,000 or $25,000, says Kerwin Holloway, a managing broker with Reece & Nichols, a unit of Berkshire Hathaway Inc., which handled the sale. At the higher price, Mr. Gallagher's home was likely to turn up in more searches. It also looked like a bargain to someone whose search started at $275,000. At the lower price, it was one of the most expensive homes priced between $250,000 and $275,000. Until recently, brokers had taken their cues from retailers, pricing a home at $199,500 because it seemed like a better deal than one priced at $200,000.

A property that's not priced properly can languish on the market and get shopworn, says Dan Elsea, president of brokerage services at Real Estate One in the Detroit area. A four-bedroom house in Troy, Mich., has been sitting on the market for 10 months, even though the price has been cut to $349,900 from $394,900, Mr. Elsea says. By contrast, a similar home in the same market sold this month for $360,000, just 23 days after it came to market priced more appropriately at $369,000, he says.

Artcle in September 24, 2006 Wall Street Journal

How to Measure the Housing Slowdown

September 24, 2006

With the housing market clearly sagging, economists and investors are watching a variety of gauges to get a handle on the severity of the contraction.

Last week, the Commerce Department reported that construction starts on new homes dropped 6% in August from July, to an annualized 1.665 million. That "housing starts" figure was about 5% lower than forecast and 20% lower than the year earlier 2.075 million. The month-over-month decline was the sixth one this year and put housing starts at the lowest level in more than three years.

The government estimates housing starts by surveying a sample of people who have applied for building permits. In places where permits aren't required, the process includes driving around looking for new-home construction.

Other gauges track new-home sales, existing-home sales, median house prices and the inventory of unsold homes.

New-home sales for August will be released by the Commerce Department Wednesday, and are expected to be down about 17% from a year ago. July's sales were down 21.6% from a year earlier, to an annualized 1.072 million homes sold.

New-home sales figures reflect market trends more quickly than do existing-home statistics. That's because new homes are counted as sold when the contract is signed, and existing homes are counted as sold only when the deal closes, which may be 30 to 60 days later.

Existing-home sales data, coming Monday from the National Association of Realtors, are expected to be down about 13% from August 2005. The annualized rate of 6.33 million existing homes sold in July represented an 11.2% decrease from last year.

The median sales price of existing homes, which is a good indicator of the market's momentum, was $230,000 in July, up 0.9% from the July 2005 price of $228,000, according to the Realtors group. That's smaller than the double-digit year-over-year gains posted in 2005.

Some parts of the country, including the Northeast, the Midwest and the West, are reporting falling home prices. The Realtors association has said the national median house price may fall in coming months, although any decline is expected to be limited. August numbers will be announced with the existing-home sales figures Monday.

Meanwhile, there's been a spike in the number of existing homes for sale. The Realtors group says 3.86 million homes were on the market last month, up from 2.76 million a year earlier. In addition to reflecting a diminished appetite on the part of buyers, that growing inventory may reflect the unwillingness of sellers to lower their asking prices enough to tempt buyers. With more houses for sale, buyers have less incentive to bid up prices, and home builders have fewer reasons to start construction on more units.

Article in September 21, 2006 Wall Street Journal

Midwest May See a Sharper Housing Slowdown

By LINGLING WEI
September 21, 2006

Homeowners in the Midwest -- the nation's industrial heartland -- are starting to see a housing bust without ever experiencing a housing boom as more job losses trigger mortgage delinquencies and foreclosures.

For months, the biggest worries over the slowing housing market in the U.S. have mainly focused on parts of the country that have seen exceptional price increases from 2000 to 2005, places with growing populations and strong economies such as California, Florida and Nevada. But recent data from the federal government and private-sector researchers point to areas in the Midwest that are witnessing a more dramatic slowdown in home prices and, in some cases, higher borrower defaults than the rest of the country.

Home prices in the region have hardly budged over the past few years because of its weaker economy as compared with other regions. Michigan, for example, has lost nearly 300,000 jobs since 2000, and its jobless rate has been consistently higher than the national average.

A recent report by the Office of Federal Housing Enterprise Oversight looked at housing prices in 275 metropolitan areas across the country. Six of the seven metropolitan areas that showed housing-price declines for the 12 months ended June 30 were in Indiana and Michigan. The study also stated that housing prices in states like Indiana, Ohio and Michigan were fairly flat over the past year but actually declined in the second quarter.

The decline in price appreciation threatens to pinch Midwest homeowners in an already difficult economic position. "In a rising unemployment situation, as experienced by some Midwest states," says Damien Weldon, director of collateral-risk analytics at First American LoanPerformance, "a lack of significant home-price appreciation can limit homeowners' ability to tap into their home's equity by refinancing their mortgages or taking out a home equity line of credit."

He adds, "The safety cushion a large amount of home equity provides simply doesn't exist for many people in that region."

An analysis conducted by First American LoanPerformance, a research firm in San Francisco, based on the latest information available, found that the percentage of loans in foreclosure in the Midwest states of Michigan, Ohio, Illinois and Wisconsin reached 0.93% in June, while foreclosures across the country averaged 0.5% -- still historically low. Michigan, hurt by job losses in the automobile industry, booked a 26.8% jump in foreclosure rates -- to 0.69% in June from a year earlier, the largest year-on-year increase within the Midwest. Meanwhile, the percentage of loans delinquent for more than 90 days in the hard-hit area was 15% higher than the national average.

The risk of default and foreclosure is even greater for borrowers with weak credit scores and high debt burden. The First American LoanPerformance analysis showed that in the four Midwest states, the foreclosure rate for nonprime mortgages ran at 4.85% in June, compared with 2.49% nationally. Ohio had the highest nonprime default rate in the region at 7.29%, and the other three states averaged 3.79%.

Rising foreclosures as a result of job losses are likely to depress local markets even more. According to a residential real-estate risk-scoring system maintained by analysts at Credit Suisse, which ranks the likelihood of home-price declines within a year, the most troubled metropolitan areas are mainly in Michigan -- cities including Detroit, Saginaw, Holland, Ann Arbor, Monroe and Jackson -- and New England areas such as Boston. The least troubled metropolitan areas are in the Northwest.

Some cities in California are also more likely to see home-price declines because of the significant run-up in home prices during the boom, but the analysts point out that the Bay area, namely San Francisco and Oakland, is actually experiencing less risk of a price decline because of rising income growth and fewer job losses in that area. Nationwide, Credit Suisse analysts believe that barring an economic disruption, the current housing-market slowdown will become "an orderly soft landing."

Article in September 16, 2006 Wall Street Journal

New Home-Buying Tricks

To Get You Into a New House,
Builders Help Sell the Old One;
Showing Off Hardwood Floors

By RUTH SIMON

September 16

Home builders have a new trick to try to sell you a new home: They will help you get rid of your old one.

Faced with falling sales, some builders are helping would-be buyers spruce up their current home by bringing in professionals who advise them on what furniture to get rid of and tell them whether they should rip off the wallpaper. Others are offering to make payments on the buyer's old mortgage (or the new one) in an effort to close the deal.

There is also renewed interest in so-called buyback programs: The builder, or a broker, agrees to buy your current home, for a preset price, if it turns out that you can't sell it.

The offers are coming both from local builders and national firms. For instance, Pulte Homes Inc. recently started pairing its customers with professional "stagers" who sweep in and do things like remove window coverings and touch up the paint, and covering up to $2,000 of the cost of the service. The program is available in about a dozen markets, including Detroit, Indianapolis, Sacramento, Calif., Tampa, Fla., and Washington, D.C.

In Phoenix, Lennar Corp.'s U.S. Home division is offering a program in which customers who sell their homes through Coldwell Banker pay 3% instead of 6% commission on the sale of their current home. (To make up for that, Coldwell Banker is paid a 3% commission for the sale of the new home.) In Detroit, Toll Brothers Inc. will make principal and interest payments of up to $2,500 a month on a buyer's new mortgage for the first six months, or give the buyer a credit equal to that amount at closing.

"Everyone is trying to be creative," says Larry August of Pacific Pride Communities, a central California builder. With so many homes on the market, selling an existing home is a "huge obstacle for anyone looking to purchase a new home." In some cases, Pacific Pride is making mortgage payments on customers' old homes for as long as six months.

The new spate of offers means that prospective home buyers have another variable to consider. On the one hand, some of these deals can put valuable extra cash in the customer's pocket, or make a deal happen that might otherwise fall apart. However, buyers need to pay attention to the fine print and make sure the terms fit their needs.

For example, special-financing offers typically require that the customer go through the builder for their mortgage. Buyers need to first check whether they can get financing that better suits their needs, and carries a lower cost, somewhere else.

Buyers may also be able to use these deals to negotiate other perks instead -- say, fancier appliances or a lower mortgage rate. "If they want some other feature or benefit that is of the same or less value, we would be willing to look at that," says Kira McCarron, chief marketing officer at Toll Brothers.

The growth of such offers comes as home sales have stalled in much of the country. Builders have already started tapping their usual raft of incentives, ranging from free swimming pools to subsidized closing costs. In some cases, they have even cut prices. The National Association of Realtors recently said it expects home prices to fall during the rest of this year.

For builders, the housing downturn has translated into slower sales and higher cancellation rates among prospective buyers who get cold feet. This month, Beazer Homes USA Inc. said that in July and August, orders fell 49% from the previous year's levels, and cancellations climbed to 50% from 26% in the same period in 2005. KB Home said this month that orders for new homes fell 43% in its fiscal third quarter.

The kinds of help builders are offering varies from market to market, and even from project to project. The best deals are typically offered on homes that are already completed, or near completion.

In the Northeast, K. Hovnanian Homes, a unit of Hovnanian Enterprises Inc., often pays to have a customer's existing home appraised (a move also designed to ensure that the property goes on the market at a realistic price). In some cases, the company will also arrange for the customer to get a lower mortgage rate, pay brokerage commissions on the sale of the existing property or pick up several months of mortgage payments.

Some builders trumpet special deals on their Web sites or in ads in local newspapers. Other offers are made quietly, on a case-by-case basis. For months, Fran Carroll, a mortgage broker in California, has been telling her builder she may not be able to close on her new home because she can't sell her current one, even after dropping the price by $151,000. The builder, Shea Homes, recently offered to pick up the mortgage payments on the new home for three months.

When Ms. Carroll balked, it boosted the offer to include mortgage payments and homeowners' association fees for six months, though she isn't sure she will accept the offer. Like many builders, Shea is making promotional offers, but extending them to people already under contract "is not a common practice," says Eric Snider, national vice president of sales and marketing.

Some builders are also increasingly willing to accept contracts that are contingent on the sale of the buyer's existing home. "We've moved from selling homes, to helping people buy," says Bob Moesta of Lombardo Homes, a builder in Detroit that this year started doing this under some circumstances.

Erickson Retirement Communities, which develops and manages communities in 10 states, has taken hand-holding further in its "Moving Home" program in Michigan. When Elizabeth Kramer decided to move into Erickson's Fox Run community in Novi, Mich., Sharon Baksa, Erickson's "relocation counselor," gave her the names of three real-estate agents who could help her sell the four-bedroom Colonial she had lived in for more than 40 years.

To make the home more attractive, Ms. Baksa recommended that Ms. Kramer pull up the carpet that covered the home's hardwood floors. She also recommended a mover and a service that could help with packing and unpacking, and helped pay for installing air conditioning for the buyer of Ms. Kramer's home.

"It was a huge undertaking and they made it easier," says Ms. Kramer, who sold her home for $235,000 in August. Erickson says it is now rolling out some of the elements of the program in other markets, including Massachusetts, Illinois and New Jersey.

Real-estate brokers say they are also starting to see renewed interest in guaranteed-buyback programs. In these programs, the seller is typically promised a preset price if the home doesn't sell within several months. Berkshire Hathaway Inc. unit Reece & Nichols, a Kansas City, Kan., real-estate broker, says it has already done 10 to 15 buybacks for builders this year, compared with none last year.

But in a cooling market, buyback offers are often greeted with a skeptical eye by sellers, who think their home is worth far more than they are promised. At Long & Foster Real Estate Inc., a mid-Atlantic broker, agents meet with three to five customers a week to explain its buyback program, but only one in 10 signs up. The others "aren't willing to believe what the actual number is," says Danny O'Sullivan of Long & Foster.

Some builders, he says, are now considering whether to make up the difference between the initial listing price and the guaranteed sale price.

Article in September 13, 2006 Wall Street Journal

Ford May Cut Salaried Costs 30% As Restructuring Push Accelerates

By JEFFREY MCCRACKEN
September 13, 2006

Ford Motor Co. will aim to cut white-collar staffing, benefits and other costs by 30% as part of a broader restructuring plan the company's board of directors is expected to begin reviewing today, according to people familiar with the matter.

Ford's board also is expected to hear details about a new vehicle-pricing strategy, which will focus on keeping prices closer to the suggested retail price amid a cut in production, said one of the people familiar with the matter. Details of its cost-cutting efforts could be disclosed as soon as Friday, said people familiar with the matter.

The 30% cut to salaried costs is on the high end of a 10% to 30% cut that had been studied by Ford, which has come under criticism that its first restructuring plan didn't go far enough. The auto maker will aim to cut back mostly on the number of managers and supervisors, with fewer cuts to lower-level, less-expensive salaried workers, said these people. The white-collar cuts will take place through the rest of this year and into 2007, said one Ford supervisor.

Under the plan, Ford managers will be told to look at their operating budgets and figure out how they can reach the 30% target. "It will be very difficult. A lot of people will lose their jobs and the people that stay will be asked to do a lot," said another person who had been briefed on Ford's plans.

Ford would look to make white-collar cuts through early retirement offers, buyouts and attrition before looking to layoffs, these people said. The cuts could include reductions in benefits such as pensions and health-care plans. The company has about 35,000 salaried workers in the U.S., including about 300 senior-officer positions and another 2,000 in director-level posts.

Marcey Evans, a Ford spokeswoman, declined to discuss the company's plans.

Ford is under pressure to speed up cost-cutting efforts after the auto maker -- No. 2 in the U.S. after General Motors Corp. in terms of production -- reported a $254 million loss in the second quarter and worse-than-expected July and August U.S. sales. The meeting is the first for new Ford Chief Executive Alan Mulally, who was hired away from aircraft maker Boeing Co. Mr. Mulally took over days ahead of Ford's deadline for announcing an accelerated restructuring plan to replace the "Way Forward" program announced early in the year. That plan called for cutting 30,000 jobs and closing 14 plants by 2012.

As speculation about restructuring actions intensified, Ford's stock rose 35 cents, or 4%, to $9.06 in 4 p.m. composite trading on the New York Stock Exchange yesterday, while GM shares rose to a new 52 week high of $33.24 before closing at $33.23. Optimism about lower oil and gasoline prices helped the Detroit auto makers, offsetting concerns that new vehicle demand could be slowing as the economy cools.

The auto maker hopes that by lowering production, either by closing plants or idling them for extended periods of time, it can avoid overbuilding vehicles and using big discounts to lure in consumers. Last month, Ford announced it was cutting production by 21%, a move that put it on pace to build fewer vehicles than in any year since 1991. GM has been following a recent strategy of lower production and less reliance on consumer incentives for most of 2006, and executives there credit the new strategy with lifting revenues per vehicle and improving projected resale values for new vehicles.

Separately, United Auto Workers leaders representing about 82,000 Ford workers yesterday were told that the company and union are still discussing a possible plan to expand early retirement and buyout offers. No details were announced, said union members attending the meeting. Ford is considering a move to expand its buyouts or early retirement offers to all of its hourly workers, according to Ford and UAW insiders. Ford has limited its offers to employees at certain stamping, engine and assembly plants.

Article in September 8, 2006 Detroit News

Home prices built up for a fall

High new and existing house inventories likely to lead to lower costs for the first time since 1993.

Kathleen M. Howley / Bloomberg News

U.S. home prices may fall for the first time since 1993 as a record number of homes for sale gives buyers the upper hand in negotiations, the National Association of Realtors said.

"We'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory," David Lereah, NAR's chief economist, said Thursday.

The inventory of new and existing homes for sale has swelled to record levels as the five-year U.S. housing boom comes to an end. Shares of U.S. homebuilders slid almost 6 percent in the last two days as Hovnanian Enterprises Inc. reported a 34 percent reduction in earnings, followed by Beazer Homes USA Inc. and KB Home both lowering their earnings forecasts.

Short-term housing investors, so-called "flippers," are putting their properties up for sale, making for "an increasingly challenging market," KB Home CEO Bruce Karatz said, detailing his firm's 43 percent drop in new orders.

The last time the monthly U.S. median price for an existing home fell below the year-ago level was February 1993, when it dipped 1.1 percent.

The median price of new homes probably will rise 0.2 percent on an annualized basis in 2006, the worst performance since prices fell in 1991, as the market was mired in a housing depression, Lereah said. The median price for an existing home probably will gain 2.8 percent, the slowest rate since 1992, according to NAR data.

The median price for a condominium dropped 0.3 percent to $225,800 from a year ago, the first decline on record, while the median for a single-family home rose 3.7 percent to $227,500, the slowest pace in six years.

The U.S. inventory of unsold existing homes hit 3.86 million in July, the highest ever, according to NAR. New homes for sale reached a record 568,000, according to Census Department data.

Article in September 8, 2006 Wall Street Journal

Housing Slowdown Takes Its Toll

Economists Say Selling Prices May Stagnate,
Or Decline, in 2007 as Cool Down Continues

By PHIL IZZO
September 8, 2006

Economists believe cooling in the housing market to extend into next year and many forecasters in the latest WSJ.com survey predict no change -- or an outright decline -- in home prices next year.

Twenty-five of the 48 economists who answered the survey's question about housing predicted no change or a decline in a closely watched gauge of nationwide home prices during 2007. The average prediction for next year was for an increase of 0.43%, lifted by five economists who forecast gains of 5% or more.

The average forecast would leave home-price appreciation well below the expected rate of inflation. Just 27% of the respondents forecast an increase in home prices of greater than 2.7%, which was the economists' average expectation of the year-to-year increase in the Labor Department's consumer-price index for May 2007.

The housing market doesn't move uniformly across the country; some regions or individual cities often have price changes decidedly above or below the national average. But the economists' predictions stand in stark contrast to the red-hot price appreciation seen over recent years.

Moreover, broad-based declines in home prices are unusual. The Office of Federal Housing Enterprise Oversight's home price index, upon which the economists based their predictions, has never posted an annual decline since its first calculation, in 1975. The last time that the index trailed inflation was in 1996, when home prices rose 2.6% compared to a 2.9% inflation rate.

The Ofheo numbers are closely watched among economists as a key gauge of the housing market, though some believe the index understates weakness in the market because it doesn't reflect concessions sometimes offered by home sellers, such as help with closing costs, which are effective price cuts.

For this year, the economists forecast a 3.5% rise in the home-price index. The index rose 13% 2005 and 12% in 2004. Ofheo is the government agency that oversees mortgage titans Fannie Mae and Freddie Mac.

"The housing correction is just in its early stages now," said Joseph Carson of AllianceBernstein, who forecast a 5% decline for 2007. "Existing home prices have come down to no-change on a year-to-year basis. For new homes, prices are below year-ago levels when you include added features. The prices will have to go lower to give demand a lift in short term."

Mr. Carson expects broad-based difficulties throughout the nation. "Affordability is an issue across the board," he said, adding he believes a major correction is inevitable. "It's pretty clear now that national home prices will drop to correct housing imbalances," said Scott Anderson of Wells Fargo & Co.

Signs of cooling in the housing market have emerged in reports over recent months. Last week, David Lereah, chief economist of the National Association of Realtors, predicted that national median home prices will generally decline over the next few months. Although the group reported a slight increase3 in median home prices for July, it said that its index of pending home sales fell 7% in the month, the most recent figures available.

David Wyss, chief economist at Standard and Poor's, said he expects prices to change little nationally. He expects drops in areas that are overvalued, such as Florida, California and the Northeast, or those that are especially susceptible to economic weakness, such as the Great Lakes region.

"The most volatility will come in areas like Florida, where there are a large number of second homes and investment properties," he said. "Places like Michigan, which is seeing declining employment, will also see home prices declining."

The survey showed that economists continue to expect modest economic growth through the middle of next year. Their average forecast for third-quarter gross domestic product, the broadest measure of economic output, put growth at a 2.8% annual rate, unchanged from their prediction in a survey conducted in August. The economists shaved their forecast for the fourth quarter to 2.5% growth from the 2.6% rate they had forecast when surveyed last month.

Twenty-two of 52 economists said recession is the greatest threat to the economy over the next 12 months, compared with 14 who said inflation is the biggest threat and nine who chose stagflation, which refers to rising inflation accompanied by stagnant economic growth. The economists raised their forecasts for the likelihood of recession for a third straight time. On average, they put the probability at 26%, compared with 15% just last spring.

Implications of 9/11

As the fifth anniversary of the Sept. 11 attacks approaches, the majority of the economists, 32 of 48 respondents, said they believe the economy is now better able to withstand the shock of a major terrorist attack than it was in 2001.

Economists noted that the economy is stronger now than it was in September 2001, when it was already in recession. Some noted that the psychological impact of an attack would be less jarring, given that an attack wouldn't be the same kind of surprise that it was in 2001. Ian Shepherson at High Frequency Economics noted that corporations are generally in better financial shape now than they were then.

"Companies are taking a more conservative approach to corporate finances now," said John Lonski at Moody's Investor Service. The Sept. 11 attacks, combined with the bursting of the tech bubble, "reinforced above-average risk aversion and made suppliers of capital less willing to lend money" to unproven borrowers, he said.

The most significant lasting implication of the Sept. 11 attacks, economists said, has been the rise in oil prices that has occurred over recent years, spurred in part by conflict in the Mideast. Twenty-six of 47 economists cited oil, while three cited increased vulnerability of consumer confidence and three others selected a reduction in talented foreign workers entering the U.S. work force. Five economists said 9/11 has had no lasting implications for the economy.

"Although the human costs of the 9/11 are incalculable, the macroeconomic costs have been remarkably small," said Nariman Behravesh of Global Insight. "Both the economic costs and impact on GDP growth were much smaller than other events, such as Hurricane Katrina."

Among other findings in the survey:

• Economists appeared to be as divided as the rest of the country when it comes to politics. When asked which outcome of the midterm elections would most increase chances of legislation to reduce the long-term budget deficit, 14 answered Democratic control of both houses of Congress, while 14 said Republican control of both chambers. Ten said a split Congress would be most effective in trimming the deficit.

• The economists, on average, predict 115,000 new jobs a month will be added to nonfarm payrolls over the next year. That is the lowest forecast since the question was first asked in June 2005, and represents the sixth consecutive drop in the estimate. They expect the unemployment rate to rise slightly to 4.8% by November, up from the 4.7% level reported by the Labor Department for August. The rate is seen at 4.9% in May 2007.

• Economists cut forecasts for crude-oil prices. On average, the price of crude was seen declining to $66.95 a barrel by December, compared with an expectation last month of $69.50. It was the first time the forecast was lowered since March. The price of crude is expected to fall to $63.91 by June 2007.

Article in September 7, 2006 Wall Street Journal

Realtors See Home Sales Falling As Builders Cut Profit Outlooks

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
September 7, 2006

Evidence mounted that the housing slowdown is in full force, with builders delivering gloomy news and a real-estate group projecting a significant drop in sales of new and existing homes and a sharp deceleration in price appreciation.

New home sales this year are expected to fall 16.1% to 1.08 million and existing home sales to dip 7.6% to 6.54 million, as the market works through an inventory backlog, according to the National Association of Realtors. NAR's latest projections released Thursday also have housing starts dropping 9.6% to 1.87 million.

Home prices will no longer post double-digit gains, the group projected. The median existing-home price will grow 2.8% this year to $225,900, with the median new home price rising only 0.2%, according to NAR. The trade association said prices for new homes were depressed by builders cutting prices and offering incentives to reduce inventory.

Beazer Homes Inc. on Thursday again cut its earnings forecast for 2006, blaming higher cancellation rates and weakening sales as the deluge of negative news from the home-building group continues. Wednesday, home builder KB Home cut its profit projection, while single-family home builder Hovnanian Enterprises Inc. reported a 34% decline in its third-quarter profit.

David Lereah, NAR's chief economist, said the dramatic downshift in price appreciation was noteworthy. "A year ago we had record home sales and tight supply with buyers bidding over the asking price," Mr. Lereah said in a prepared statement.

"Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory," he added. The cooling housing market means investors who purchased homes last year intending to sell them shortly thereafter could face losses.

"Buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned," Mr. Lereah said.

Atlanta-based Beazer said net home sales for the two months ended Aug. 31 fell 49% from the year earlier as the cancellation rate rose to 50% from 26% in the same period in the previous year.

"As compared to prior years, a higher percentage of home closings are being deferred or cancelled, immediately prior to closing in many cases, due to worsening buyer sentiment and the inability of buyers to sell their existing homes," the company said.

Beazer said in expects to close on fewer homes in its fiscal fourth quarter than anticipated, and trimmed its 2006 per-share profit forecast to a range of $8 to $8.50 a share.

In July, the company lowered its annual estimate to $9.25 to $9.75 a share as the housing market began to slump. Beazer said its revised 2006 outlook "also contemplates potential charges to exit non-strategic land positions currently under review." It estimates it will deliver between 12,000 and 13,500 homes in fiscal 2007. In fiscal 2005 the company closed 18,146 homes.

KB Home cut its profit projection for the year ending Nov. 30 to between $8 and $8.50 a share, from a June forecast of $10 a share, reflecting what it called "an increasingly challenging" housing market.

The home builder said unit net orders "continue to be adversely affected by higher cancellation rates" in many markets. Traffic to KB Home's new-home communities and gross unit orders were each down about 11% during the third quarter.

The Los Angeles company, which has operations on the West Coast, in the Southwest, in the Southeast and in the central U.S., also said it expects to report earnings for the third quarter ended Aug. 31 of $1.85 to $1.95 a share, down from year-earlier net income of $227.5 million, or $2.55 a share. It expects to report net orders for the quarter of 5,989 units, down 43% from a year earlier.

Hovnanian reported the lower profit as the company struggled with higher costs, slower-paced orders and increased cancellations.

The Red Bank, N.J., company reported net income of $77 million, or $1.15 a share, for the quarter ended July 31, down from $116.1 million, or $1.76 a share, a year earlier. The company booked $11.4 million in write-offs for walk-away costs and an additional $800,000 in land write-downs for the latest quarter.

Revenue rose 18% to $1.55 billion from $1.31 billion in the prior-year period. Costs rose 26% to $1.43 billion from $1.13 billion a year earlier.

Net contracts for the third quarter, excluding joint ventures, declined 19% to 3,349 contracts. On the same basis, the dollar value of net contracts decreased nearly 24% to $1.1 billion from $1.4 billion last year. Hovnanian's contract-cancellation rate rose to 33% from 24%.

Article in September 1, 2006 Wall Street Journal

Housing Chill Begins to Pinch Nation's Banks

Slower Demand for New Loans May Hit String of Strong Profits;
Few Default Concerns -- So Far

By ROBIN SIDEL
September 1, 2006

The cooling housing market is starting to pinch the nation's banks, which are more exposed to real estate than ever -- and it comes at a time when some of their other key businesses already are being squeezed.

Although real-estate downturns typically trigger concerns about rising delinquencies and defaults on existing mortgages, the more pressing worry in the industry right now is that a slowdown in demand for new loans will cut into earnings that have been exceptionally strong.

That is significant because financial institutions already are grappling with several issues. They include a difficult interest-rate environment, competition for traditional banking customers, a saturated credit-card market and expectations that strong consumer-credit quality will soon show signs of weakening.

"Any wiggle in the real-estate business has a significant impact on banking because that's where the growth has been coming from," says Richard Bove, an analyst at Punk, Ziegel & Co.

The Commerce Department last week reported that sales of new single-family homes fell 4.3% in July to a seasonally adjusted annual rate of 1.1 million. The National Association of Realtors, meanwhile, said that existing-home sales fell in July to the lowest level since January 2004.

Indeed, banks have begun to warn investors that the housing slowdown is starting to hurt their business. FirstFed Financial Corp., a Santa Monica, Calif., bank with a large mortgage business, said in a securities filing Monday that its mortgage originations were down 47% in July from year-earlier levels. The next day, First Horizon National Corp., a Memphis, Tenn., bank that sells home loans across the country, said it expects mortgage originations to fall by $1 billion in the third quarter due to a falloff in applications. And Punk Ziegel's Mr. Bove last week cut his rating on Salt Lake City-based Zions Bancorp to a "hold" from a "buy" due to views that the bank, which provides loans to home builders, will experience lower volumes as construction slows and land values decline.

Banks have ridden the real-estate boom over the past five years by pitching traditional loans, newfangled mortgages and home-equity loans that can be used to pay off credit-card bills or fund a new plasma-screen television.

While the banks reduce their exposure to these loans by selling some of them into secondary markets, real estate still amounts to a chunk of their assets.

As a result, real estate, including mortgages, home-equity loans and commercial loans, represented a record 33.5% of the U.S. banking industry's $9.298 trillion in assets in July, according to the Federal Reserve. The numbers represent the highest level in the Fed's database going back to 1973.

Although the nation's biggest banks have sprawling operations, their share of the mortgage market also has grown during the boom, whether through acquisitions or internal expansion. At J.P. Morgan Chase & Co., the nation's third-largest bank as measured by assets and market value, real estate represents about 13% of the bank's assets. That is a slight increase from 2003, when real estate was less than 10% of Bank One Corp.'s assets and about 11% of J.P. Morgan's assets. J.P. Morgan acquired Bank One in 2004.

At Bank of America Corp., the nation's second-largest bank, behind Citigroup Inc., home-equity loans represented 5% of assets as of June 30, up from 4% at the end of 2001.

"Five years ago, you would have said that mortgage risk was pretty [small] for the banking industry as a whole, and for the large banks in particular, but it is hard to say that today," says Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc., which specializes in the financial-services industry.

So far, bank executives and Wall Street analysts are expressing little concern about the prospects for a big increase in mortgage delinquencies or defaults, particularly if unemployment stays low and the economy shows signs of strength despite high gasoline prices. They say that credit-scoring models are far more sophisticated today than they were in previous housing cycles. Delinquencies stood at 4.41% in the first three months of the year, up from 4.31% in the year-earlier period, according to data released by the Mortgage Bankers Association, a trade group, in June.

Still, the mortgage market is filled with new types of loans that were far less prevalent -- or didn't exist at all -- in previous housing downturns. These products, such as interest-only loans or adjustable-rate mortgages in which the borrower can choose from multiple payment options, are viewed as more risky than traditional fixed-rate mortgages. The trade association says that fewer than 25% of all mortgages are adjustable-rate loans.

"The oldest saw in banking is that bad loans are made in good times," Keefe's Mr. Cannon says. "We have never really faced a weakening housing market with the structure of the mortgage market as it is today."

Article in September 2, 2006 Wall Street Journal

Realtors Official Forecasts Decline In Home Prices

By JAMES R. HAGERTY
September 2, 2006

The chief economist of the National Association of Realtors predicts that U.S. home prices will generally decline during the next few months.

The unusually bleak assessment from David Lereah, the trade group's top economist, came as the Realtors reported that their index of pending home sales dropped 7% in July. The decline shows that home shoppers continue to take their time, hoping prices will fall amid a glut of houses on the market in many parts of the country.

"I'm hoping for prices to drop," Mr. Lereah said in an interview. The Realtors normally stress the tendency of home prices to rise over the long term. But Mr. Lereah said lower prices are needed in some parts of the U.S. to lure buyers back into the market. During the past year, sales have plunged in California, southern Florida and the Washington, D.C., area, all places where prices more than doubled in the first half of this decade.

Sales have stalled partly because "the sellers are not bringing prices down fast enough," Mr. Lereah said. "They've been very stubborn." A drop of 5% to 10% in California and southern Florida "probably would be enough to bring sales back," he said.

For July, the Realtors reported that the national median home price was up 0.9% from a year earlier. But Mr. Lereah said he expects the national median to decline modestly in the next few months. That would mark the first decline since 1993. "The quicker we can get negative prices, the quicker we can get sales coming back," Mr. Lereah said.

Thomas Lawler, a housing economist in Vienna, Va., said the national median home price in this year's fourth quarter is likely to be down 3% to 4% from a year earlier.

In recent months, median prices in some areas -- including San Diego, Boston, the Virginia suburbs of Washington and parts of Florida -- already have fallen from year-earlier levels.

The pending-sales index, which equates the average pending-sales rate of 2001 to 100, registered 105.6 in July. The latest reading was down 7% from June and 16% from July 2005. The index, based on signed contracts for home sales that haven't yet been completed, has fallen nearly 18% since hitting a peak of 128.2 in August 2005.

By region, the July index was down 20% from a year earlier in the West and Midwest, 16% in the Northeast and 11% in the South.

On Wednesday, the Mortgage Bankers Association reported that its seasonally adjusted index of applications for home-purchase mortgages declined 1.6% in the week ended Aug. 25. That index -- a measure of demand for homes -- is down about 20% from a year ago.