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."