Home prices fall as sales plummet; South spared decline
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.