Article in February 23, 2007 Detroit Free Press

Businesses crying ouch as customers pinch pennies

February 23, 2007

BY KIMBERLY LIFTON

FREE PRESS SPECIAL WRITER

Customers at Berkley's Coffee Beanery have traded their large mocha lattes for less-expensive cups of fresh-brewed java. Some of the working lunch crowd is opting for the $5 Burger King meal over a $12 lunch tab at a sit-down restaurant.

At the upscale Bang Salon in West Bloomfield, some women are walking into the cold with wet hair to trim their bills up to $30 by skipping a blow dry.

"Everyone is suffering, but you can't give up everything that makes you feel good," said hairdresser Adria Bircoll of Bang. "Clients are going longer between services, leaving wet and going home to blow dry their own hair."

From fast-food chains to country clubs, auto body shops to maid services, metro Detroit business operators say anxious consumers at all income levels are pinching pennies in an economic squeeze shown in day-to-day buying decisions.

The community is in "trade-down" mode, according to Coffee Beanery co-owner Dan Cleary and King Ventures President Mark Schostak, whose company runs 62 Burger King and three Del Taco restaurants in Michigan. Schostak said consumers who typically opt for casual dining go to quick-serve establishments during difficult times.

"We are seeing some of this trade-down, and some of our existing customers buying more items off of our value menu," Schostak said.

David Littmann, senior economist for the Mackinac Center for Public Policy, who retired in 2005 as senior vice president at Comerica Bank, said that in his 40 years as an economist, "it has never been this difficult."

"People are cutting out the nonessentials like lawn services, and dialing down their heating and air," Littmann said. "They are finding little ways to save a few hundred dollars a year. No matter what they save could get set back by any new taxes."

Small businesses are struggling, doing what they can to creatively market their services, while consumers are doing more for themselves, said Littmann.

Many shops are downsizing, and some are closing.

Auger's Auto Body Collision, which began in Quebec in the 1890s servicing buggies and moved to Detroit in the 1940s to profit from the growing automotive industry, is reducing its repair operations. Sales are down. Insurance companies are taking repairs in-house. The company plans to lease out one of the two 10,000-square-foot buildings at its Rochester Road headquarters in Clawson.

"People are so unsure of what their futures are they don't even want to spend $500 to $1,000 on deductibles," said Beverly Auger, accounting manager for the business founded by her late husband's grandfather. "They figure the dent will stay there."

Added Judy Rheaume, manager for Merry Maids Berkley, "When people cut back, we are not in their budgets. They clean their own houses. It's a perk and one of the first things to go."

Mainstays such as Dobie Jeweler's in Royal Oak and Leon's Salon in Grosse Pointe Farms are slated to close after decades in business.

"Business has slowed in the last five years," explained Dan Dobie, a third-generation Dobie family jeweler. "This past year has been flat. We decided we can make more money leasing the space than running the business."

Even the country club set is feeling the pain.

"We are pruning down a tree to the most viable limb," said Dr. Barry Feldman, president of Knollwood Country Club in West Bloomfield and owner of Millennium Medical Group in Southfield. "At Knollwood, we have already done what they are doing at Ford, GM and Chrysler. We are in trickle-down mode, and it is still evolving."

Littmann and others said no sector is immune from the downturn.

"Whether rich or poor, a 20% decrease in disposable income feels the same for everyone," said retired CPA Neal Zalenko. "It is not about the amount of money someone has. It is about percentages. Anyone who experiences a decrease in disposable income suffers."

Single mom Mary Vinson, a dental office manager from Clarkston, lives paycheck to paycheck. Last year, she treated herself to two haircuts. In better times, six cuts and an occasional eyebrow wax were standard.

Vinson's condo is listed for less money than she paid for it. Her daughter is set to graduate from high school this June, and Vinson is trying to pony up some money to help pay for college. "I go straight home after work. I go to the grocery store once every two weeks. We eat in. I don't drive anywhere I don't have to.

"We don't buy anything we don't need and nothing unless it is on sale," Vinson said. "I got my daughter a cap and gown, but I couldn't order high school graduation photos."

The Hebrew Free Loan Association, which offers emergency financial assistance to Jewish people, is providing more short-term loans than ever before to help doctors, lawyers, real estate agents and engineers to pay house notes, utilities and basic living expenses, said executive director Mary Keane. The majority of recent loans were for residents in Oakland County's wealthiest suburbs: West Bloomfield, Farmington Hills, Bloomfield Hills and Birmingham, she said.

"We're finding now people who lost their jobs and are trying to balance and downsize their lifestyles," Keane said.

Article in February 17, 2007 Wall Street Journal

Sharp Drop in Housing Starts Adds
To Fear of Wider Economic Impact

By CHRISTOPHER CONKEY and JAMES R. HAGERTY
February 17, 2007

A sharp drop-off in new-home construction is adding to concerns that the housing downturn's impact could linger well into this year and eventually seep into the wider economy.

Builders slashed construction of new homes last month to the lowest level in nearly a decade, a move that underscores the severity of the sector's slump and signals it will likely continue to be a drag on the economy at least through midyear. The slip in homebuilding last year subtracted more than 1 percentage point from inflation-adjusted economic growth over the second half of 2006.

Monthly home-construction readings are volatile and prone to weather-induced fluctuations, and last month's plunge may somewhat overstate the market weakness. But signs of deterioration in riskier segments of the home-mortgage market, along with stagnant or declining home prices in many parts of the country, provide additional reason for concern.

The plunge in new homebuilding activity in January -- down 14.3% from December and 37.8% from January 2006 levels -- could eventually hasten a recovery by reducing the overhang of unsold homes, however.

So far, the weakness in housing has yet to spill over significantly to consumer spending, the dominant driver of U.S. economic growth. Instead, it has slowed the pace of expansion just enough to reverse last year's inflation surge. Still, the possibility of further deterioration in the sector this year remains a primary risk to economic growth -- particularly if it is accompanied by rising loan defaults or a broad tightening of credit standards.

So far, defaults and late payments have remained very low on prime mortgages, which are made to lower-risk borrowers and account for the bulk of home loans. But late payments have risen swiftly over the past year on subprime mortgages -- those made to risky borrowers with spotty credit histories -- and on "Alt-A" mortgages, a category between prime and subprime which includes many loans for which borrowers haven't documented their income. According to trade publication Inside Mortgage Finance, 13% of mortgages outstanding are subprime. (See Hot Topic on page A7.)

In November, payments were at least 60 days overdue on 12.9% of subprime loans packaged into mortgage securities, up from 8.1% a year earlier, according to First American LoanPerformance, a research firm in San Francisco. For Alt-A loans, the delinquency rate jumped to 2.1% in November from 1.1% a year earlier.

The upsurge in late payments and delinquencies has created turbulence among subprime lenders, and some large banks that bought subprime loans a couple of years ago have been pressuring subprime-mortgage lenders to buy them back. In its most recent survey of senior loan officers, released last week, the U.S. Federal Reserve found that some banks are getting more stringent to guard against this threat of defaults. About 18% of domestic banks reported that they had tightened credit standards on residential-mortgage loans over the past three months, the Fed said, adding that this was "the highest net fraction posted since the early 1990s."

But Fed officials and many other economists say the problems in subprime lending aren't severe enough at this point to significantly hamper economic growth. Doug Duncan, chief economist of the Mortgage Bankers Association, a Washington-based trade group, said only 6% of homeowners have subprime, adjustable-rate mortgages. Even if one-tenth of these end up in foreclosure -- the peak hit after the 2001 recession -- Mr. Duncan said that "it's hard to see how that can be a macroeconomic event."

Concern would rise if troubles spread further among lower-risk borrowers and lead to more defaults of Alt-A mortgages.

Another risk is that many subprime loans were made to buy houses in high-priced areas, which may be more vulnerable to price declines. Any widespread delinquencies on these loans could result in lenders seizing the underlying homes and dumping them on the market. That could exacerbate the industry's inventory problem, which has already put downward pressure on prices and forced builders to increase discounts and incentives.

Torn between yesterday's housing report's implications of slower growth and diminished inflationary pressure -- which makes additional interest-rate increases less likely -- stocks were virtually unchanged yesterday. The Dow Jones Industrial Average rose three points to close at 12768.

Pat Moroney, who heads the Phoenix division of Standard Pacific Homes, a California-based home builder, said sales-cancellation rates in Phoenix soared as high as 70% at times last year, and averaged 50% for the year as a whole. The company has been offering incentives to potential buyers between $15,000 and $100,000 to help move unsold homes in some markets, up from $5,000 to $10,000 in 2005.

"We worked pretty hard to get through our backlog" of unsold homes, Mr. Moroney said. "We've pushed a lot of cancellations through." In January, the cancellation rate fell to 32%, he said.

Given the stockpile of unsold homes, many industry officials and economists greeted the sharp drop in new-home construction last month as welcome news. "I think it's a positive indicator," said Ara K. Hovnanian, chief executive officer of Hovnanian Enterprises Inc., a large home builder based in Red Bank, N.J. He said the figures reflect a decrease in new-home orders over the past year and will help builders clear their inventories, paving the way for a gradual recovery to begin later this year.

Economists say the sooner builders cut back, the sooner a rebound can occur. "We look at this number, and it makes us a bit more optimistic about when we're going to see a recovery," said Todd Vencil, a housing analyst at BB&T Capital Markets in Richmond, Va.

Meanwhile, the industry's continuing supply adjustment is likely to continue to affect the broader economy. Dave Seiders, chief economist at the National Association of Home Builders, predicts that the cut in residential investment will shave one percentage point from the economy's inflation-adjusted growth rate in the first quarter, more than he was anticipating late last year.

"Now we're talking about a heavier hit," he said.

Job losses in the sector are also likely to mount. Zoltan Pozsar, an economist at Moody's Economy.com, said 170,000 housing-related jobs have been cut since April 2006. Luckily, the rest of the economy has added nearly 1.78 million jobs over that span, and the labor market continues to boost wages and provide support for increased consumer spending.

Separately, the Labor Department said wholesale prices fell 0.6% last month and was only 0.2% higher than a year ago, another indication of ebbing inflation concerns. And the University of Michigan said consumer sentiment slid to 93.3 in early February from 96.9 at the end of January.

Article in February 18, 2007 Wall Street Journal

'Short Sales' Rise
As Housing Market Cools

By RUTH SIMON
February 18, 2007

As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the number of "short sales" is increasing.

In a short sale of a home, a lender allows the property to be sold for less than the total amount due. In many cases, the lender forgives the remaining debt.

Short sales fell out of favor when mortgage delinquencies were low and rising home prices made it easy for borrowers who ran into trouble to sell their homes or refinance their mortgages. But as the housing market cools, interest in short sales is increasing.

Bank of America says it saw short sales of homes increase 25% last year, albeit from relatively low levels. In San Diego, the number of entries in the local multiple-listing service that include the words "short sale" has climbed to 129 from 50 a little more than a year ago, according to Sandicor, the local multiple-listing service.

The renewed interest in short sales comes as mortgage delinquencies climbed to 2.51% in the fourth quarter, according to Equifax and Moody's Economy.com. That's up from 2.33% in the third quarter and the highest level since a recent peak of 2.53% in the first quarter of 2002.

Economists attribute the increase in delinquencies in part to a weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates. In addition, as demand for mortgages softened, lenders loosened their standards and made riskier loans.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners' association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There's also the chance that the property could be vandalized.

For borrowers, a short sale is a way to avoid having a foreclosure on their credit report. A short sale can be less of a black mark than a foreclosure on a borrower's credit record because it indicates that the borrower was working with the lender.

But there can be downsides as well. Under certain circumstances, the debt forgiven by the bank may be taxable to the borrower. What's more, convincing a lender to go along with a short sale can be difficult. Borrowers who have a mortgage and a home-equity loan may also have to negotiate with two lenders or two departments of the same bank.

"There are all sorts of logjams," says John Izzo, a real-estate agent in Las Vegas. Mr. Izzo says he is currently working on 19 short sales, but figures just "one in five might be successful."

Article in Fabruary 16, 2007 Wall Street Journal

Home Improvement Lite

As Market Chills, Owners Try Cheaper Renovations;
'I Made Some Bad Decisions'

By JUNE FLETCHER
February 16, 2007

The housing slump is hitting the home-improvement industry.

After several years of double-digit increases, spending on remodeling was sluggish last year. In response, manufacturers of countertops, appliances and other remodeling products are introducing cheaper alternatives as homeowners trim their makeover budgets -- scaling back the size of their projects, doing their own handiwork or acting as their own contractors, sometimes with disastrous results.

At the International Builders Show last week in Orlando, Fla., Acoustic Ceiling Products came out with a plastic backsplash that resembles tin but costs half as much. Viking Range Corp. rolled out 72-inch-tall stainless-steel refrigerators priced at $2,875, scaled down from their 84-inch, $7,975 behemoths. And Lutron Electronics introduced do-it-yourself options at about half the price of some of its professionally installed lighting systems.

The new products are a departure from many of the luxury lines introduced during the housing run-up, when giddy homeowners thought nothing of putting in $1,200 hand-blown glass sinks, rock crystal chandeliers and tricked-out spas with built-in flat-screen TVs. As real-estate prices rose, such improvements often paid off handsomely when the house was sold.

But as home prices have fallen, so too have the financial rewards of renovating. The median price of new and existing homes dropped 10%, to $225,000, in the fourth quarter of 2006 over the same period a year before, according to the National Association of Home Builders. The value of remodeling has been shrinking, too: A homeowner who finished a basement -- a $57,000 job on average nationally -- got back 79% at resale in 2006. In 2005 the same job returned 90%, according to the 19th-annual Hanley-Wood's Cost Versus Value survey, published last fall. Remodeling a bathroom with upscale products like stone countertops and a bidet cost $38,000 and returned 77% in 2006, down from 93% in 2005.

The diminishing returns have dampened spending on remodeling, which grew by 1.5%, to $168.7 billion, in the fourth quarter of 2006 over 2005, according to a report released in January by Harvard's Joint Center for Housing Studies. In 2004 and 2005, quarterly increases were as high as 20%. Many homeowners are choosing to "postpone or pass on major home improvements," says Nicholas Retsinas, the director of the center, and that is likely to continue until the housing market picks up.

Less is More

At the builders show, Formica Corp. launched 26 laminate countertops that mimic wood, river rocks and even algae, with names like Planked Deluxe Pear, Walnut Quarstone and Tangle Seaweed and priced from $11 to $24 per square foot installed. Meanwhile, the company offered only four new versions of its more expensive solid-surface counters, which cost $28 to $48 installed.

Therma-Tru, known for its high-end entry and patio doors, introduced a fiberglass line with faux wood finishes that mimic cherry, mahogany, walnut and oak. Prices start at $692, about half the price of custom, solid-wood doors.

Appliance manufacturers are adjusting to the new austerity as well. For its Profile line, General Electric introduced a freestanding range with four burners and double ovens. It's a scaled-down version of some of the giant six-burner commercial ranges that have been popular for a decade -- and at $1,199 to $1,499, about one-third the price.

Even one of the so-called idea homes at the show reflected a chastened post-boom mindset. In the Renewed American Home, a renovated 1909 bungalow in downtown Orlando, many of the house's original wood finishes and trims were replaced with realistic but cheaper fakes, including laminate cabinets and wood-composite interior doors. "It's like the car industry bringing out cheaper versions of luxury cars," says Stephen Gidus, the Winter Park, Fla., builder who remodeled the house.

Downscaling Downstairs

When Stu Fause, a retired hospital executive, decided to create a media room in the basement of his New Tripoli, Pa., home last year, he scaled down the project, in part because home prices in his area, while not falling, aren't appreciating at the double-digit rates that they were two years ago. Instead of finishing the entire space, he had two-thirds of it done and placed his big-screen television on a $160 stand from Target rather than spending ten times as much to have it built into the wall. He also opted for inexpensive materials like sheet-vinyl flooring, and a fiberglass tub and surround in the bathroom. The entire job cost him $15,000, about a third less than if he'd finished the whole basement and used premium materials.

Mr. Fause, who has no immediate plans to move but is remodeling with an eye to resale, figures he can get away with downscaling downstairs because the rest of his four-bedroom home, which he bought last year for $427,200, already has pricey features such as marble baths and a whirlpool spa. In a declining market, he says, owners have to be judicious about where they spend their remodeling dollars. "It's what's upstairs that counts," he says.

Some manufacturers are more actively courting the do-it-yourself market, which exploded during the housing run-up and has continued apace during the slowdown. In 2005, cost-cutting homeowners spent $44.9 billion on DIY projects, up from $38.1 billion in 2003, according to the Harvard housing center.

Lutron Electronics introduced its first DIY system at the builder's show -- a preprogrammed, wireless "smart" lighting-control package called AuroRa. It includes a control panel, remote-control antennae and five dimmer switches that the company says can be installed by anyone handy enough to replace a light switch. Total cost: $750, about half the price of a professionally installed system. DuPont, meanwhile, brought out Simplicity, a countertop that's built to the homeowner's specs and arrives ready to install. At $29 a square foot installed, it's 42% cheaper than averaged-priced site-built countertops, the company says.

Of course, doing it yourself doesn't always save money. Over the past year, Craig Margulis, owner of a Phoenix handyman service, has seen a spike in calls from people who want him to repair their mistakes. And these days, many of the callers live in million-dollar homes. Mr. Margulis thinks that's because they're tapped out after stretching to buy their houses at the height of the market. "They'll try to do everything themselves to save a few dimes -- and then we have to rip everything they've done out," he says.

Megan Bittle, a St. Louis kitchen designer, is seeing more of what she calls "buy it yourself" clients -- affluent homeowners who won't get their hands dirty but try to save a little money by acting as designers and general contractors for their projects. The strategy often backfires, she says, because home products are becoming increasingly complicated and there's a shortage of skilled labor. She recently got a frantic call from a homeowner who'd hired an inexperienced plumber to put in a sophisticated shower system. The plumber installed a valve upside down, reversing the hot and cold taps, and the newly tiled bathroom wall had to be torn down to fix the problem.

Repapered, Rewired, Regrets

Kim Hanson-Brown and her husband, Don, had their share of problems last fall when they renovated their 19th-century home in Unionville, Va., recently appraised at $2.5 million. They decided to transform the dated farmhouse into a French Country-style manor, with arched doorways, wrought-iron chandeliers, and red and yellow toile wallpaper. They chose high-quality materials to stay competitive with other horsey estates nearby. But since they couldn't be sure that home values would continue to appreciate as much as during the boom, the couple tried to shave costs by doing the plans themselves and hiring local subcontractors to do the work.

Though they thought they were up to the task, the couple made plenty of mistakes. First they had their ceilings finished with fresh drywall -- only to realize they'd forgotten to plan for light fixtures; the ceilings had to be taken down so wiring and junction boxes could be installed. In one room that was wallpapered before a leaky upstairs shower was fixed, a wall got moldy and the pricey paper had to be stripped and replaced. Another room was painted before demolition work was begun on an adjacent bathroom; when a sledgehammer broke through a wall, it had to be patched and redone. Oops.

"I made some bad decisions," says Ms. Hanson-Brown, a specialty magazine publisher. The couple figures they'll wind up spending at least $100,000 on the project (still in progress), more than three times their original budget. They recently hired an interior designer and are planning to hire an architect as well to guide them through the rest of the process. Although she doubts they will recoup their costs, Ms. Hanson-Brown thinks the upgrades will help sell the house more quickly.

Some homeowners are hiring a pro to do the planning and then doing most of the labor themselves. That's what Michelle Wandres and her husband, Tom, did when they decided to upgrade the yard around their five-bedroom Victorian in Germantown. Md., last summer. They had a landscape designer do the plans and then went to work installing lighting, planting bushes and trees, and laying walkways. Doing the work was a "real headache," says Ms. Wandres, a graphics designer, but it cut costs in half -- a sensible approach in a market where prices of similar homes have fallen from about $1.1 million to $900,000. She hopes to sell when her son goes off to college next year, and wants her house to be in top condition so it will be competitive. In her price range, she says, "buyers expect certain things."

Article inFebruary 16, 2007 Wall Street Journal

Housing Starts Sink 14.3%
To Lowest Point in 10 Years

PPI Indicates Underlying Inflation Is in Check

By JEFF BATER and BRIAN BLACKSTONE
February 16, 2007

Home construction fell to its lowest point in nearly 10 years during January in an unexpectedly large decrease that erased hopeful gains posted in two prior months.

A separate report showed wholesale prices fell last month, after two strong months of gains, suggesting that underlying inflationary pressures remain broadly contained and are in line with the Federal Reserve's expectations. Core prices, however, which exclude volatile food and energy costs, rose slightly, suggesting there is potential for inflation. A third report showed a drop in consumer sentiment in a mid-February reading.

Housing starts plunged by 14.3% to a seasonally adjusted 1.408 million annual rate, the Commerce Department said Friday. Building permits also resumed falling. The government raised its original estimate for December starts. Construction rose by 5.0% to 1.643 million, revised from an originally reported 4.5% climb to 1.642 million.

Wall Street expected a much smaller decline in starts during January. The median estimate of 25 economists surveyed by Dow Jones Newswires was a 2.6% decline to a 1.600 million annual rate. The last time construction was lower was August 1997, when starts were at 1.390 million.

Housing has taken a toll on the economy, reducing the growth rate in the fourth quarter of last year by 1.16 percentage points to 3.5%. Sales of new homes tumbled in 2006, forcing builders faced with rising inventories to offer incentives in order to move property.

Some recent data, however, had indicated the slump might have hit a bottom. The latest government report on new-home sales, for example, showed a 4.8% increase in demand during December. Year over year, demand was 11.0% lower.

The National Association of Home Builders reported Thursday its index measuring views held by builders about sales prospects of new, single-family homes rose in February to 40 from 35. However, that reading suggested builders, while feeling significantly more confident than a month ago, remained generally pessimistic about the market. The index was based on a survey of 350 home builders, who answer questions about sales prospects now and in the near term. When the Housing Market Index exceeds 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales.

Friday's report said January building permits fell by 2.8% to an annual rate of 1.568 million. Economists expected permits would fall by 1.4% to 1.590 million. Permits increased a revised 6.6% in December to 1.613 million, compared with an earlier estimated 5.5% climb to 1.596 million.

Regionally, housing starts last month decreased by 28.5% to 301,000 units in the West, 15.2% to 195,000 units in the Midwest, and 11.8% to 716,000 units in the South. Starts rose 8.9% to 196,000 units in the Northeast.

Breaking down the rate of 1.408 million overall U.S. starts in January, single-family housing fell 11.2% to 1.108 million units. Construction of housing with two or more units decreased 24.1% to 300,000; within that category, groundbreakings of homes with five or more units -- or multi-family -- fell 20.5% to 276,000 units.

An estimated 95,400 houses were actually started in January based on figures unadjusted for seasonal factors. An estimated 112,100 building permits were issued last month, also based on unadjusted figures.

Article in February 1, 2007 Detroit News

Home price slide not over

After lousy '06, values could hit bottom and sales could pick up this year, analysts say.

The best that can be said about the Metro Detroit housing market is that some of the worst may be over.

And the worst that can be said is that the rest of the worst is yet to come.

Year-end numbers for 2006 show home prices across the region fell by 7.1 percent, their biggest drop since 1989. Home sales dropped, too, down 11.2 percent, according to the multiple listing service Realcomp.

The only number that went up wasn't a good one. That's the number of homes listed for sale, and it soared across southeast Michigan by a staggering 41.2 percent.

Even after all that, home prices haven't bottomed out yet, real estate experts say, but probably will sometime this year. The only good news is that buyers seem to be coming off the sidelines after years of waiting out job uncertainty in our troubled auto-dependent economy.

Median sales prices dropped about 5 percent in Macomb and Oakland counties, almost 7 percent in Livingston County and more than 13 percent in Wayne County. That means the owner of a $200,000 home lost $10,000 to $26,000 in value.

The number of sales dropped, too, by a whopping 25.3 percent in Livingston and 22 percent in Oakland. Wayne sales fell 3.4 percent while Macomb saw an actual -- but slight -- increase of 1.2 percent.

But any good news from last year was more than offset by the soaring number of homes hitting the market. In Wayne, the number of listings increased 35 percent; in Oakland it was nearly 47 percent; and in Macomb, 50 percent more homes were slapped with "For Sale" signs.

"I never saw values go down like this," says Steve Cole, a 32-year real estate veteran with Weir, Manuel, Snyder & Ranke in Birmingham. "This year will be the bottom. We'll probably see an increase in sales numbers, but I don't think we'll see an increase in home values."

Auto industry woes blamed

The obvious culprit is Detroit's ailing auto industry, and the layoffs, loss of overtime, job cutbacks and buyouts that come with massive restructurings at Ford Motor Co. and General Motors Corp.

As more workers learn their fates, those who see their jobs survive will begin to take advantage of the bargains on the market, real estate brokers say.

"The people I'm selling to are feeling secure about their positions," explains Karen Thomas, an associate broker with Coldwell Banker Schweitzer in Commerce Township. "They're attitude is 'Let's go ahead and take advantage of the market.' "

Others seem simply to be getting used to living under the cloud of southeast Michigan's troubled economy.

"They've been scared for a while, and now the current market has become the norm for them," Thomas adds. "I think that everybody has just become a little bit immune to it."

One question raised by the massive buyouts at Ford and GM is whether workers will stay put in Michigan or decide to move on in search of new jobs.

"There will be a rush because a lot of those people are going to get jobs out of state," Cole says.

Foreclosures are on the rise

Another issue that could continue to hit the market is the rising number of foreclosures.

Wayne County ranked first in the nation and Michigan fifth in the percent of households in foreclosure in 2006, according to RealtyTrac. One of every 21 Wayne households entered foreclosure last year, the equivalent of 40,219 households.

As more foreclosed homes are dumped on the market, listings climb while prices drop, and it's unclear whether the situation will get better or worse this year.

At the moment, foreclosures aren't tapering off, says Doug Schrandt of Life Properties in Chesterfield. His firm works with Macomb County owners who are in danger of losing their homes to foreclosure.

"We have a steady 60 to 70 homes a week," Schrandt says. "Some areas are really suffering, like Eastpointe and the areas closer to Detroit."

The foreclosure market could improve as auto-related job losses slow down. Or it could increase as more adjustable-rate mortgages continue to reset, hitting struggling homeowners with rising monthly payments that may push their house payments beyond reach.

"We've got lending institutions to blame as well as the auto companies," notes Thomas.

Regulators have leaned on mortgage lenders to tighten their lending standards to stem the tide of defaults, not just in Michigan but across the nation.

ARMs will be a factor

Still, the damage may be done. While there aren't any estimates available for Metro Detroit, the Mortgage Bankers Association estimates that across the nation $500 billion in adjustable-rate mortgages will reset this year as many three- and five-year ARMs expire.

The loans have been popular ways for homebuyers to stretch their budgets to get into a home. Just how many of those loans stretch beyond the breaking point will play a big role in our market.

Homeowners who can afford to refinance can find relief thanks to continued low mortgage rates, points out Eric Burgoon, head of retail mortgage for LaSalle Bank in Troy. The Federal Reserve voted to leave interest rates unchanged Wednesday. Area lenders note that refinancing activity increased 25 percent to 50 percent in December when 30-year interest rates dipped to their lowest point in 11 months.

"If you see a dip in rates at any time we will see some pickup in refinancing," Burgoon says.

LaSalle also is highlighting new mortgage products. One offered through homebuilders allows buyers to put no money down, pay no closing costs or to buy with no payments for up to eight months.

"One of the main challenges we have is that a lot of people want to move but haven't been able to sell their houses at this point," Burgoon notes.

In the meantime, starter homes in the $150,000 range are selling better than high-end homes, brokers say. That's partly because demand is steadier at that level, and because some savvy owners of cheaper homes are taking advantage of the price decline to trade up. Though they take a hit on the sale of their less expensive home, they save much more off the price of a more expensive property.

Higher-end homes will continue to stay off the market unless homeowners are desperate. Cole just handled the sale of a Birmingham home for more than $600,000 where the owner still had to bring nearly $80,000 to the closing to cover the shortfall in what he owed to the bank.

"If buyers don't buy now," says Cole, they've got to be crazy.

In the long run, the pick-up in home sales should prompt a gradual rise in home prices as the excess inventory is absorbed in the market. That's expected to start showing up sometime in 2008, real estate experts say.

"Once everything starts, it all works off itself," notes Burgoon of LaSalle Bank. "If you can start to get some homes sold, it's a positive domino effect."