It's Going to Be a Tough Spring for Home Sellers
Call them the three stages of real estate grief.
At first, there is denial, like the kind John Davis and his wife, Jeffy Griffin, were living in when they put their three-bedroom home in Boulder, Colo., up for sale last April for $850,000. "We were pretty unrealistic," Davis, a 47-year-old licensed clinical social worker, admits of his hopes for selling the charming but small farmhouse near downtown. "We just figured it's such a great house ... in the perfect neighborhood."
Then, after denial, comes anger. Like the kind he felt six long months later when a buyer made a low-ball offer, then left town for a weeklong hunting trip. "I couldn't even get ahold of him to make a counteroffer," he gripes of the agonizing days leading up to his decision to pull the house from the market and rent it out for a while.
Finally, there is acceptance, a feeling Davis and Griffin now share since relisting their house last month for $140,000 less than the original asking price. "We're finally coming to that place [of acceptance]," Griffin says of the couple's attitude adjustment. "We're not going below a certain price. And if we need to, we'll find another renter. But we've dropped down to a fair number, and we feel good about that."
After more than a year of hoping they could get what their neighbors did at the market's peak, sellers like Davis and Griffin are finally coming to grips with an increasingly ugly reality. While not yet in freefall, the country's housing slump is starting to look more like a bust as bulging inventories of unsold houses and an alarming rise in bad loans and foreclosures have helped push the nation's median existing-home price down by $19,600 from its July peak of $230,200. That's an 8.5 percent drop, prompting the first annual price decline since a nationwide recession in 1990.
Just like then, economically depressed areas, such as parts of Michigan and Indiana, have led the downturn, as well as formerly hot markets in Florida and California, like Sarasota and Santa Barbara, each of which suffered annual price declines last year of around $70,000, or 18 and 12 percent, respectively. Also hit hard are outlying suburbs and exurbs where buyers had gone to escape big-city prices, such as Stockton, Calif., a 1
Yet even in prime locations, larger, high-end homes in the $400,000-to-$700,000 range (double that on the coasts) have come under increasing pricing pressure, as buyers who had hoped to trade up put off their moves. "First, you have to sell your house, and then you've got to give up that 5 percent mortgage and take out a new one at 6.5 percent," Standard & Poor's chief economist David Wyss says of the weakest segment of the market. "So a lot of people are deciding, 'I don't really need that extra bedroom after all.'"
Such hesitance strikes gloom in the hearts of home builders like Donald Tomnitz, chief executive of D. R. Horton, who had hoped to sell 50,000 homes this year, many of them to trade-up buyers. "I don't want to be too sophisticated here, but '07 is going to suck," he told an investor conference earlier this month, "all 12 months of the calendar."
With unsold inventories of more than half a million new homes industrywide-about 200,000 more than when the housing boom began in earnest four years ago-and the cost of owning one 40 percent or more than it was then, analysts believe it could take as long as two years for some local markets to reach equilibrium.
Summer of discontent? That said, aggressive discounting that builders and homeowners like Davis and Griffin have recently succumbed to is a sign that the downturn may at least be nearing what S&P's Wyss calls the "acceptance stage," when sellers finally give in and reduce prices enough to start attracting buyers. The markdowns could help increase sales during the crucial spring selling season. But analysts like Wyss expect prices to continue their decline through the end of the summer, when sellers yet to unload their properties will be at wit's end. "That's when buyers will get the best deals," he says. "In springtime, [sellers'] hope springs eternal. But at the end of the season, they'll realize they'll have to let this thing sit over the winter again."
Those who do may find the situation even worse down the road, as lenders now enduring a surge in mortgage delinquencies among subprime and other less-creditworthy borrowers try to unload a growing number of foreclosed homes. "There's a lot on the market and more on the way," Credit Suisse housing analyst Ivy Zelman says of surging numbers of bank-owned homes. According to her analysis, the pent-up supply of such distressed properties could add more than a half-million "must sell" homes to the market in the coming two to six months.
"The peak pinch year will be 2008," Christopher Cagan, research director at First American CoreLogic, says of a coming surge in borrowers facing resets in their adjustable rate mortgages. He projects 1.1 million reset-related defaults over the next five years, and an additional 70,000 for every 1 percent fall in home prices, especially in places like San Diego where ARMs represented 40 percent of all new loans issued last year. "The more prices fall, the less equity [homeowners] have and the more trouble they'll have refinancing," he says.
That leaves would-be sellers with few choices. "If you absolutely have to sell, then lower your price now and get ready to negotiate," says June Fletcher, author of the book House Poor: How to Buy and Sell Your Home Come Bubble or Bust. "But if you don't have to sell now, I would just hold off for a while, because things are probably going to get worse before they get better."
Of course, the converse is true for those looking to buy. With mortgage rates still well below their peak last July and falling in recent weeks, "buyers are in the catbird seat," says Mark Zandi, chief economist at Moody's Economy.com, who expects rates to hold steady through year's end at around 6 percent for a conventional fixed-rate mortgage. "They can afford to take their time and be a tough negotiator."
That's what led Suzy Buckley to keep her cashier's check in her pocket when she attended a real estate auction in Miami earlier this month. "The number I had in my head was $510,000, which would have been a really great deal," she says of a South Beach condo that had previously been listed for $799,000. But when other bidders pushed the price above $600,000, "I figured, no reason to jump in yet," Buckley says.
With the local market flooded with condos and as many as 20,000 more units due to be completed in the next two years, "it's a good time to be looking around," says Florida housing analyst Jack McCabe. "But a year from now may be a better time to buy."
That is, as long as you still qualify for a loan. The escalating fallout in the subprime market is already making it harder to secure a loan as regulators clamp down on loose lending practices and banks scramble to tighten credit standards.
Drying up. In just the past two weeks, Boulder mortgage banker Lou Barnes says he has received an almost hourly stream of directives from lenders anxious to reduce their risk. One all but eliminated loans to borrowers who can't sufficiently document their income, while another stopped lending to anyone who can't come up with a minimum 5 percent down payment.
"Anyone going for those kinds of loans should expect the whole process to be a lot more uncertain than it was in the good old days," Barnes says of the credit tightening. "But it will be better in the end, because more people who qualify will actually be able to afford their payments."
That's cold comfort to Davis and Griffin, who have already seen one deal fall through since relisting their house. "I still feel like we're at a fair price for where we live," Griffin insists. All she needs now is a qualified buyer who feels the same way.