The Spring of Home Sellers' Discontent
In the end, there was no loud burst, or even a sharp pop. Instead, the springtime aftermath of the nation's housing bubble is sounding "more like a whoopee cushion," says June Fletcher, author of House Poor: How to Buy and Sell Your Home Come Bubble or Bust. "The air is coming out of the market, but slowly."
Indeed, the numbers suggest that things are likely to get worse before they get better. After a sluggish start to the spring selling season, the National Association of Realtors reported that pending sales dropped 3.2 percent in April, the most recent data available, while mortgage applications fell about 2 percent over the past month, according to the Mortgage Bankers Association. Meanwhile, inventories of unsold homes in major metro areas rose another 5 percent in May, according to ZipRealty, nearly a one-third increase over the same time last year. And while home builders have cut back on construction by about as much, "they still have a lot of money in the ground," Credit Suisse housing analyst Ivy Zelman says of the raw land still on builders' books. "And the only way to get their cash back is to build more houses."
With about a quarter of a million finished new homes waiting for buyers and 700,000 existing homes sitting empty, "the fundamental problem is too much inventory," says Mark Zandi, chief economist at Moody's Economy.com. "Until builders curtail construction and sellers cut prices more aggressively, the market will continue to lose air."
Plenty has already seeped out. Since peaking last summer, the median price of an existing house has now fallen by $9,300 to $220,900, about 4 percent, according to the NAR. That's the first year-over-year decline ever. But prices are still a third ahead of where they were when the market began its amazing run back in 2003. Sales, too, have fallen by about 20 percent since their 2005 peak, while the inventory of unsold homes has nearly doubled to an unwieldy 8.4-month supply.
Yet with a national economy still strong enough to fend off a market-popping recession-gross domestic product grew a solid 3.1 percent in the first quarter excluding residential construction-economist Kenneth Simonson says "it's more psychology than actual hardship that's keeping most of the buyers away. And they're not going to come back until they're convinced prices won't keep going down."
More cuts. That stinks for sellers and home builders. Their hopes for the normally hot spring selling season have already been dashed by buyers wielding low-ball offers or, even worse, those too gun-shy to even make one. Indeed, economists say many sellers will have to reduce their prices by at least as much as they have already—another 4 percent or so—before the market finally reaches equilibrium. Given how slow some have been to do that, "it's probably going to take until next summer before things finally bottom out," Zandi says.
Some local markets have lost plenty of ground already, such as Detroit, where automakers' continuing tailspin has pushed unemployment up and house prices down—by more than 8 percent over the past year. In San Diego, even a steady local economy hasn't been enough to keep prices from dropping by about 6 percent, according to Standard & Poor's Case-Shiller Home Price Indices. Other once-hot markets like Las Vegas and Phoenix have suffered even bigger reversals, going from eye-popping 50 percent annual price increases a few years ago to single-digit declines this year.
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