The market is definately cooling.. But, like politics, all real estate is local. Our area in Newport County is holding up well and we will be seeing new jobs. New jobs equals demand for housing. We still have too much supply but if the demand stays constant we’ll be fine..
By Adam Shell, USA TODAY
Selling a house the past few years has been easy. Put up a “For Sale” sign. Host an open house. Sift through multiple offers. Pick a buyer willing to fork over more cash than you initially asked for. Then brag about how much you got.
That was then. And now? While there’s still a plentiful pipeline of home buyers looking to make a deal, finding one willing to make a split-second decision to buy and pay whatever it takes to get in the door is no longer a lock, real estate agents say.
In what could signal a mood shift in the feverish real estate market, tales of bidding wars and 30% annual price gains are quietly fading.
Instead, there’s nervous chatter about the recent increase in the number of homes for sale, sellers cutting their asking prices and builders wooing buyers with incentives.
The reason: There are signs that the overheated market might finally be cooling. The Commerce Department, for example, said sales of new homes in September fell shy of expectations, median prices declined 5.7%, and the number of new homes for sale shot up to a record 493,000. Freddie Mac also said October mortgage applications seem to be “tapering off.”
It’s not just the megahot markets such as New York City, San Diego and Phoenix showing stress. Softness is also being reported in condo-happy Las Vegas, the stalled auto capital of Detroit and Midwest college towns such as Madison, Wis.
Most real estate agents and economists are not forecasting a real estate collapse, although some doomsayers say the bursting of the “bubble” is inevitable. Instead, they say the temperature of the housing market is dropping from an unhealthy 104.3 to a reading closer to the norm of 98.6.
“The market is leveling off, but it’s not like there’s a huge crash going on,” says Pam O’Connor, CEO of Chicago-based Leading Real Estate Companies of the World.
Adds California-based agent Toni Martinez: “More buyers want to sleep on it before making an offer.”
Richard DeKaser, chief economist at National City, says the five-year housing bull run peaked this summer. “What we will see is a dramatic slowing in price appreciation,” he says. Only a few, high-risk markets, he predicts, will experience price declines.
Once white-hot San Diego County is a test case. Home sales there fell 4.7% in September from year-earlier levels, and price appreciation slowed to 3.8%, says DataQuick Information Systems. Despite the pullback, DataQuick analyst John Karevoll describes the market as “stable” and “more normal.”
Other signs of a slowdown:
• Ricardo Cortazar, a Realtor in Tempe, Ariz., says it now takes 35 days, on average, to sell a home. Six months ago, it took a week. Inventory in Arizona has swelled to 15,000 homes, vs. 6,000 in May.
• Vaughn Bryan, a real estate agent in San Bernardino County, has spotted another ominous trend: a rise in the number of 90-day listing contracts that expire without a sale.
• Dan Elsea, a Detroit Realtor, says it’s common for sellers in the job-starved Motor City to reduce asking prices two, three or four times before signing a deal.
• Kelly Haslam of Madison, Wis., hasn’t been able to sell her bungalow-style home despite putting it up for sale “by owner” seven weeks ago, hosting four open houses and dropping her price once.
• Judi Keenholtz, CEO of Empire Realty, which serves San Francisco’s East Bay, says desirable homes in good school districts that used to fetch eight to 10 bids now get three or four.
Angst among agents
Signs of cooling have created angst among real estate agents. “You now have agents in the office walking over to other agents asking, ‘Why has this property not sold?’ ” says Martinez, an agent at Century 21 Lois Lauer Realty in Redlands, Calif.
Much of the perceived softness must be kept in perspective, says J. Lennox Scott, a Seattle-based broker. He says business remains robust, citing price gains of 16.3% in September, vs. a year ago. What looks ominous is less so considering fresh numbers are being compared with record highs. “Homes continue to sell briskly,” he says.
An existing home that sits on the market for four months is not uncommon when compared with long-term housing data, says National Association of Realtors (NAR) spokesman Walter Molony. A nationwide supply of homes that would take six months to sell is considered healthy. There is now a 4.7-month supply, up from 4.3 in May, the NAR says. In the 1990-91 recession, supply hit nine months.
Business is slowing, but not enough to create a true buyer’s market. Yet, the recent inventory buildup could signal a shift from the years when sellers could name their price, says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington, D.C.-based think tank. “Suddenly, the expectations of many sellers are being dashed,” he says.
Part of the problem, Baker says, is that today’s sellers are pricing their homes based on what comparable homes went for six months ago and tacking on an extra 10%. That formula, he says, is too aggressive.
High-end properties and the more speculative, investor-driven condominium market are under the most pressure. The Florida condo market, suffering from oversupply, overinflated prices and speculation, is prone to price declines of 20% to 30%, says Jack McCabe, a Deerfield Beach, Fla., housing consultant. In Miami-Dade and Palm Beach counties, 11,465 units are under construction, permits for an additional 14,500 have been OK’d and plans for 36,000 more have been announced. Prices are “changing as we speak,” he says.
The pricier end of the market suffers more from sticker shock. “Homes in the $1 million to $2 million range in hot metro areas are more vulnerable,” says O’Connor.
Buyers become cautious
To sell, homes have to be priced right. Many potential buyers, their confidence shaken by high oil prices and hurricane fatigue, have turned cautious. They’re leery of overpaying amid predictions of a downturn.
Interest rates have also been creeping up. Freddie Mac says the average 30-year fixed-rate mortgage is 6.15%, up from 5.64% a year ago, making monthly payments less affordable. The average monthly mortgage payment in Southern California in September was $2,034; that’s $30 below the inflation-adjusted April 1989 peak but up 50% from 2000, DataQuick says.
In another subtle shift, many people looking to buy who a few months ago might have rushed to avoid paying higher prices are now waiting for prices to fall.
Take New Yorker Carl Haacke. He wants to move, but is in no hurry to make a bid on the elegant Brooklyn brownstone he covets. Instead, he’s watched the asking price drop $200,000 from its initial $1.7 million. He figures if it drops once, it’s likely to drop again. “That’s my incentive to wait,” Haacke says. If that strategy becomes the norm, more sellers will lower their prices to lure buyers back into the market.
The big question, Haacke says, is whether this is a temporary pause or the start of a longer-term downturn. “No one knows,” he says.
Bubble theory proponents say it will end badly, with sharp price declines and intense financial pain like that investors suffered after the tech stock bubble burst in 2000. But for that to occur, it would take a dramatic rise in interest rates or a major shock to local economies resulting in steep job losses, says Mark Milner, chief risk officer at PMI Mortgage Insurance, a Walnut Creek, Calif.-based provider of mortgage insurance.
Optimists are betting on a so-called soft landing, characterized by flat or slightly declining prices. After analyzing soft landings in once-hot markets such as the United Kingdom and Australia, a report by ING Wholesale Banking said the U.S. housing market won’t crash.
The Mortgage Bankers Association expects price gains to slow to around 5% in 2006 as the rate on 30-year fixed-rate mortgages rises to 6.75% by year’s end, still low by historical measures.
Both bulls and bears have evidence to back up their predictions. Much — but not all — of current data show that sales volume and price gains are still healthy, suggesting no danger of an imminent collapse.
September existing home sales came in at their second-best level ever, although sales were boosted by heavy buying in the Gulf Coast region after Hurricane Katrina, the NAR says. In early October, the NAR said its “pending home sales index” set a record. The national median price of a home was $212,000 in September, up 13.4% from a year ago — but down from $220,000 in August.
If you compare more volatile month-to-month, or quarter-to-quarter, data, a slowdown appears to be underway. The best recent example: a report of a third-quarter 2005 slowdown in New York City. The average sales price rose to $1.15 million, up 10.1% from a year ago, but was down 12.7% from a record $1.32 million in the second quarter.
While confident real estate agents rule out a double-digit price downdraft, such as the one Dallas saw in the early ’80s, the risk of sizable price drops can’t be ruled out, a recent PMI study said. Its “Market Risk Index,” based on an analysis of the 50 biggest markets, found a 22% chance of a price decline in the next two years. PMI estimates home prices are overvalued by 33.7% in Los Angeles, 25.6% in central New Jersey, 25.5% in Las Vegas, and 18.2% in Washington, D.C.
“A lot has happened since June that has created a more risky housing environment,” says Marco van Akkeren, an economist at PMI. “We have seen an increase in inflation, mortgage rates have jumped by half a percentage point, and the outlook for the economy is less certain in the wake of the hurricanes.”
Contributing: Mindy Fetterman from McLean, Va; Dennis Wagner of The Arizona Republic in Phoenix; Ben Jones of The Post-Crescent in Appleton, Wis.; Matt Reed of Florida Today; Mike Linn of Montgomery (Ala.) Advertiser.
