Home prices fall as sales plum­met; South spared de­cline

The Washington Times Weekly - - National - By Pa­trice Hill

Home prices dropped ev­ery­where in the coun­try ex­cept the South, while sales plunged to Jan­uary 2004 lev­els last month, in news that trig­gered a drub­bing in the stock mar­ket on Aug. 23 on wor­ries that a hous­ing free fall could drag down the econ­omy.

Me­dian home prices dropped 2.1 per­cent over July 2005 lev­els in the North­east, 0.3 per­cent in the West and 0.6 per­cent in the Mid­west, the Na­tional As­so­ci­a­tion of Real­tors re­ported, con­firm­ing fears that the most over­heated hous­ing mar­kets on the East and West coasts are ex­pe­ri­enc­ing a rare de­cline where home­own­ers are at risk of los­ing some of the ro­bust gains they en­joyed in their homes’ value dur­ing the hous­ing boom.

Ahefty price gain of 3.2 per­cent in the South pre­vented the first over­all de­cline in the na­tional me­dian house price since 1995. Most South­ern mar­kets out­side Florida did not ex­pe­ri­ence the dou­bling or tripling of val­ues seen in the North­east and West dur­ing the boom and are con­tin­u­ing to ap­pre­ci­ate as buy­ers at­tracted by the com­par­a­tively low prices flock to the re­gion.

Na­tion­wide, the con­do­minium mar­ket con­tin­ued to lead the broader home sales mar­ket lower last month, with drops of 10.5 per­cent in sales and 1 per­cent in prices in the last year. Home sales over­all are down by 11.2 per­cent from a year ago, the Real­tors said.

As grim as the news was, prompt­ing a 42-point drop in the Dow Jones In­dus­trial Av­er­age, Phillip Neuhart, eco­nomic an­a­lyst with Wa­chovia Se­cu­ri­ties, said there is more to come.

“We would not be sur­prised at all to see me­dian home price ap­pre­ci­a­tion turn neg­a­tive soon,” he said. Af­ter years of re­lent­less dou­ble-digit price in­creases in Wash­ing­ton and other ma­jor coastal cities, the com­bi­na­tion of record high prices and sharply ris­ing in­ter­est rates made homes less af­ford­able than they have been in nearly 20 years.

It is forc­ing buy­ers to scale down their ex­pec­ta­tions and buy smaller and less ex­pen­sive homes, Mr. Neuhart said, which in turn is caus­ing the rapid de­cline in the me­dian home price — the price where half of the homes sold are more ex­pen­sive and half less ex­pen­sive.

Home­own­ers in once-boom­ing ar­eas such as Wash­ing­ton who have been try­ing to sell at last year’s record-high prices are now con­fronted with hav­ing to cut their prices or with­draw from the mar­ket, Mr. Neuhart said. He ex­pects to see many homes taken off the mar­ket, al­le­vi­at­ing some pres­sure on prices by draw­ing down the record num­ber of homes for sale.

David Lereah, chief econ­o­mist of the Na­tional As­so­ci­a­tion of Real­tors, said the price soft­en­ing is good news for the mar­ket be­cause it is draw­ing in buy­ers again.

“Many po­ten­tial home buy­ers have been on the side­lines, some ‘kick­ing the tires,’ but mostly wait­ing for sell­ers to com­pro­mise on prices and terms,” he said. “Now sell­ers in many ar­eas of the coun­try are pric­ing to re­flect cur­rent mar­ket re­al­i­ties. As a re­sult, there could be some lift to home sales” later this year.

The Real­tors group said most peo­ple who have owned their homes for more than a year can still look for­ward to sell­ing at a gain rather than a loss.

Most an­a­lysts ex­pect the hous­ing de­cline to last a long time, how­ever.

“Since it was one of the big­gest hous­ing ex­pan­sions in his­tory, we have ev­ery rea­son to ex­pect the cor­rec­tion to be sub­stan­tial as well,” said Alexan­der P. Paris, an­a­lyst at Bar­ring­ton Re­search.

Like the tech­nol­ogy stock bub­ble that pre­ceded it, the hous­ing bub­ble be­tween 2000 and 2005 was fed by easy credit made avail­able by an army of mort­gage bro­kers of­fer­ing loans with easy terms in the short run but ex­plod­ing pay­ments in the long run, he said.

The burst­ing of the tech­nol­ogy bub­ble in 2000 is widely blamed for pre­cip­i­tat­ing the 2001 re­ces­sion. That is one rea­son many economists fear a reck­on­ing in the hous­ing mar­ket could have sim­i­lar con­se­quences.

Mr. Paris said the heavy in­volve­ment of banks in fa­cil­i­tat­ing the bub­ble, in­clud­ing the way they en­abled con­sumers to cash out large chunks of home eq­uity to splurge on a variety of pur­chases through re­fi­nanc­ings, means the hous­ing de­cline will have big reper­cus­sions for the econ­omy.

If con­sumers lose 25 per­cent of the $11 tril­lion in home value they held a year ago, con­sumer spend­ing will be slashed by $380 bil­lion, he es­ti­mates.

“The great re­fi­nanc­ing boom is over and the ad­di­tion to con­sumer spend­ing power it pro­vided is gone as well,” he said. “The most pain is still ahead,” in what could be a long-last­ing down­turn for hous­ing, he said.

“If the hous­ing cor­rec­tion gets out of hand,” he added, “the ques­tion­able fi­nanc­ing tech­niques and ag­gres­sive bor­row­ing will come home to roost” and re­sult in bank­rupt­cies and in­sol­ven­cies not only among con­sumers but among banks and other cred­i­tors.

Roger M. Kubarych, econ­o­mist at HVB Group, ex­pects the rapid de­cline of hous­ing to con­tinue, but not lead to a re­ces­sion.

“The rea­son is that fi­nan­cial in­sti­tu­tions are still rel­a­tively ea­ger to make mort­gage loans,” he said, and an eas­ing in mort­gage rates is likely in the months ahead be­cause the sharp fall of hous­ing will force the Fed to re­frain from rais­ing in­ter­est rates fur­ther.

Afor-sale sign stood out­side a home in Mi­ami on Aug. 23. Most South­ern mar­kets out­side of Florida did not ex­pe­ri­ence the dou­bling or tripling of val­ues seen in the North­east and West dur­ing the hous­ing boom.

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