The Spring of Home Sellers' Discontent
Unsold houses pile up, and the bottom still seems far off
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 Zip Realty, 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 recorded. 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 at a 1.5 percent annual rate 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 drops this year.
And while prices in places like Los Angeles have remained relatively firm, there are more and more bargains to be had there, thanks to a housing inventory that has fattened by 30 percent since last year, including a growing supply of foreclosed properties repossessed from borrowers who defaulted on high-interest subprime loans. Take, for instance, the two-bedroom townhouse that Bryan Metoyer picked up last month at an auction in L.A. that disposed of 275 bank-owned properties in just a day.
"I was trying to get it for under $300,000, but another bidder stayed right in there with me," he says of the competition, which he finally won with a $320,000 bid.
Still, Metoyer figures he saved about $50,000 from what similar units have sold for recently. And although he expects the market to remain soft for a while, "I don't see a bubble bursting here. It's either going to hold steady or go back up again. So either way, I win."
Continuing defaults in the subprime lending market will surely mean more distress sales—like the ones auctioneer Robert Friedman plans to hold for properties in California's Central Valley, Atlanta, and south Florida this summer. "But I don't think it will be anywhere as bad as it was during the last downturn [in the early 1990s]," says Friedman, chairman of Real Estate Disposition Corp., which only recently began holding auctions after what he describes as a decade-long "hibernation." "My sense is that we'll be through this in about two years, then we'll go back to sleep again."
Subprime. Indeed, mortgage bankers estimate that although about 1 in 10 subprime borrowers is now defaulting on a loan, taken together they represent only about a half of 1 percent of all 75 million U.S. homeowners. "It's not an eyebrow-raising number," says John Robbins, chairman of the Mortgage Bankers Association, who points to Fed Chairman Ben Bernanke's recent conclusion that he doesn't expect "significant spillovers" from the subprime market to the rest of the economy.
That said, tightening credit standards—not only for subprime borrowers but also for more creditworthy ones—has clearly dampened demand and pushed sellers to do more than just lower prices. In a recent survey by the Federal Reserve, nearly half of all loan officers said they had raised their standards for nontraditional loans, while 15 percent said they had increased requirements on prime borrowers, raising credit score minimums and more closely scrutinizing property appraisals.
To move their homes, builders who once required big deposits before even breaking ground are now making deals like the one Vera Struchkouskaya inked this month on a $460,000 apartment in the CanCo Lofts in Jersey City, N.J. The nonbinding contract required only a $2,500 deposit, "and I get to see the finished apartment before I have to commit," she says of the early 2008 move-in date. "So if I find something better in the meantime, I can take it."
And if not, she can always ask the CanCo builder for an even better deal.
This story appears in the June 18, 2007 print edition of U.S. News & World Report.