In Housing, the Strong Turn Weak  

by Vikas Bajaj
Wednesday, May 28, 2008 

America’s home-buying season, when for-sale signs sprout like dandelions, is shaping up to be even worse than expected this year, with prices falling, sales slowing and few signs of a turnaround emerging. 

Two reports released on Tuesday captured the bleak picture. One showed that home prices nationally fell 14.1 percent in March from a year earlier. The other showed sales of new homes, although up slightly in April, remained mired near their lowest levels since 1991. 

While Wall Street is growing hopeful that the economy may dodge a recession, many economists warn that the pain in the housing market may last for several years. 

Even markets that once seemed immune to the slump, like Seattle, are weakening. Prices nationwide might fall as much as 10 percent more before a recovery takes hold, economists said. 

As the home-buying season enters what is traditionally its busiest period, there are simply too many homes in many parts of the country, and too few people with the means to buy them. 

The situation is likely to get worse because a rising tide of foreclosures is flooding the market with even more homes, while a slack economy and tight mortgage market are reducing the pool of potential buyers. 

“It’s like eating beyond your stomach’s capacity,” said Ronald J. Peltier, the chief executive of Home Services of America, which owns real estate brokerage firms across the country. “We have huge indigestion.” 

Sellers confront a sober reality: There are more than 4.5 million homes on the market nationwide. The way houses are selling, it would take nearly 11 months to clear the market. The last time so many homes were for sale was in the early 1980s, when the economy was in a deep recession and interest rates were two to four times as high as they are today. 

The inventory is not spread out evenly across the country. Manhattan and choice neighborhoods in San Francisco and downtown Boston, for example, do not appear to be suffering from the kind of glut that is hurting suburban Phoenix, southern Florida and inland areas of California. 

In Manhattan, prices do not seem to be falling, even though sales dropped 23 percent in April and the first half of May, compared with the same period a year ago, according to Miller Samuel, an appraisal firm. The number of units available for sale has risen by 11 percent, to 6,859. 

Some other cities, like Dallas, Houston and Charlotte, N.C., where home prices did not surge this decade, are not hurting as much either. Charlotte and Dallas were the only areas out of 20 key markets that registered higher prices in March than February. 

In all, however, sales of existing single family homes tumbled 20 percent in the first four months of the year from the comparable period a year ago and are running at their lowest levels since 1998. Sales of new homes have fallen 42 percent over the last year. 

The Commerce Department reported on Tuesday that sales increased 3.3 percent in April from March, when sales tumbled 11 percent, although the increase largely reflected a statistical revision to the earlier figures. 

In Seattle, where housing had held up better than much of the rest of the country in the last two years, home sales have slowed sharply. Sales in King County, which includes Seattle, fell more than 33 percent in April from the same month a year earlier while the number of homes for sale is up 55 percent. 

Prices of single-family homes have fallen about 6.5 percent from their peak in July 2007 to February, according to the Standard & Poor’s Case-Shiller index, which tracks prices nationwide. 

As in other regions, the slowdown is hitting outlying areas first and hardest. Sales and prices are still robust in Seattle and affluent suburbs like Bellevue because they are more desirable and closer to big employers. 

“We are still getting multiple offers on properties there,” Phil Rodocker, a Seattle-based real estate agent, said about the downtown area and Bellevue. But “as you move south, every 10 miles south you go, you see more and more short sales and repossessed houses.” 

Builders are having trouble selling units in some newer condominium buildings. Mr. Rodocker got an e-mail message from one developer last week who a few months ago had quickly sold 251 units in a project under construction. Now, investors who had signed contracts to buy 40 of those units had reneged. 

The units in the Belltown section of Seattle are now being resold for as little as $225,950 for a one-bedroom apartment with one bathroom, prices that Mr. Rodocker said were so low as to be “ridiculous.” Last fall, one-bedroom condos in the neighborhood were selling for $260,000 to $290,000, he said. 

Seeing the number of homes on the market rise and prices fall, buyers are becoming more picky and negotiating harder, he and other agents said. Lower prices usually spur demand, but many buyers are waiting because they think prices will fall farther. 

One of Mr. Rodocker’s clients, Dennis Humphrey, lives south of Seattle in Tukwila and has been looking to buy a home with three or four bedrooms and one or two bathrooms. Parents of 10-year-old twin boys, Mr. Humphrey and his wife live in a rental home and want a bigger place. 

Mr. Humphrey, who works in the home improvement division of Sears, has made offers on two homes, but the sellers have refused to negotiate. He is willing to spend up to $300,000 and has enough money to put 20 percent down, but Mr. Humphrey said he was worried prices were going to fall farther and could wipe out any money he puts into a home. 

“I am not afraid of the monthly mortgage payment, and I am not afraid of taxes, but I am afraid of losing the value I am putting in,” he said. “I believe the right deal will come along, and I am in no rush,” He added 

About 35 miles south, outside Tacoma, Irené Foster-Worthy and her husband have received no offers on their three-bedroom, two-bath ranch home since they put it on the market a month ago. The couple plan to retire to a home they are buying on an island near the Canadian border to be closer to their children. 

“Only about four people have come to see it, which makes it difficult to sell,” she said. 

While some buyers seem to be waiting, many others have been locked out of the market. 

Since early 2007, lenders have sharply scaled back the easy-lending policies that powered the boom. Most lenders are now making only loans that conform to the standards set by Fannie Mae, Freddie Mac or the Federal Housing Administration, which all require either a substantial down payments or mortgage insurance. 

“Once the credit pendulum starts swinging from too easy, it never stops at neutral — it goes to too tight,” said Lou Barnes, a mortgage broker in Boulder, Colo., who said he was turning down about two applicants a week. During the boom, he rarely had to turn down borrowers. 

Some analysts say the scrutiny is well deserved even if it slows borrowing and home sales because it will assure better loans are made. Compared with standards over a long period of time, these people say, lending guidelines are not all that conservative; it is just that the nation became accustomed to credit at easy terms. 

“One could say there is less money available,” said Marc McGree, a real estate consultant outside Washington. “But today’s standards really aren’t so different from eight years ago or so, before the market overheated.” 

Better lending and cheaper prices should eventually restore balance to the market, economists say. From their peak, prices have already fallen 16 percent, more than half the way to the 25 percent drop that the economists at Lehman Brothers expect, for instance. 

In recent months, sales have increased in some areas with high foreclosure rates like Las Vegas. The increase reflects a rise in the sales of repossessed homes by lenders at lowered prices. 

Some real estate officials say places like Boston, which led the national downturn, may be approaching a bottom. Home prices there appear to be falling more slowly than before, and the number of homes for sale declined in the first quarter. J. Patrick Lashinsky, chief executive of ZipRealty, the real estate brokerage firm, says his agents are seeing more buyers shopping for homes. 

Places “that did not have huge run-ups or were very early are doing well,” he said. “Boston is one of those.” 

Still, sales of single-family homes and condos fell by more than a third in the first three months of the year, compared with the same period in 2007, according to the Greater Boston Association of Realtors. 

Edward E. Leamer, a professor of economics and statistics at the University of California, Los Angeles, said this real estate downturn was playing out differently than the one in the early 1990s, when prices fell gradually over several years in Los Angeles, New York and elsewhere. The sharper and more rapid decline now probably reflects the impact of easy lending during the recent boom. As a result, it might also augur for a somewhat faster recovery, but Mr. Leamer is not ready to predict when that will be. 

“You will eventually get to the point where you will find a market equilibrium,” he said. But “the economist’s model for supply and demand doesn’t tell you how long it will take to get there.” 

Christine Haughney contributed reporting.