2006 may well go down as the year Pluto was suddenly just another big rock, Brad and Angelina had a baby and the real estate market slid from great to miserable in a few short months.
In data released Tuesday, prices declined in more than 61 of the 275 cities tracked by the Office of Federal Housing Enterprise Oversight. And the deceleration has been fast: The agency reported that the decline in quarterly appreciation was steepest in more than three decades.
Nationally, at the end of August, sales of existing homes were down 11.2% from July.
The national numbers mask how much better -- and worse -- things are in local markets. In Texas cities, the Carolinas, Utah, New Mexico, Oregon and Washington, real-estate markets are strong. Sales volume and prices are dropping in overpriced markets like California cities -- particularly San Diego -- some Florida cities, Northern Virginia and Las Vegas. In some markets, like Detroit, it is exceedingly difficult to sell a property at all. Prices declined in 13 of the 16 metro areas in Michigan.
Among prominent cities where second-quarter prices fell were: Boston-Cambridge, Cincinnati, Detroit, Indianapolis, Kansas City, Manchester, NH, Pittsburgh, Pa., Portland, Maine, Reno, Rochester, Minn., Toledo and Youngstown, Ohio. Prices fell in the California cities of Napa, Sacramento, Redding and San Luis Obispo, and in the Florida cities of Fort Walton Beach-Crestview-Destin and Punta Gorda.
Price decreases, however, largely were concentrated in Colorado, Ohio, Pennsylvania, Michigan and Indiana. In the second quarter, the biggest drops were in:
- Columbus, Ind., -3.55%
- Bay City, Mich., -3.10%
- Greeley, Colo., -2.63%
- Appleton, Wisc., -2.56%
- Athens-Clarke Co., Ga., -2.58%
- Oshkosh-Neena, Wisc., -2.32%
- Eau Claire, Wisc., 2.08%
- Detroit, Mich., -2%
Second-quarter growth was greatest in:
- Bend, Ore, 7.37%
- Myrtle Beach-Conway-North Myrtle Beach, SC, 6%
- Boise-Nampa, Idaho, 5.64%
- Coeur d'Alene, Idaho, 4.81%
- Miami-Miami Beach-Kendall, Fla. 4.72%
- Wilmington, NC, 4.5%
- Bremerton-Silverdale, Wash., 4.32%
"We purchased 2 (single-family homes) in Fl, one in Niceville and the other in Crestview, brought near the top of the market and have been unable to sell them. The one in Niceville sat empty for almost a year, listed with a realtor and we did not receive one offer, even after a price reduction. The one in Crestview was empty for 6 months FSBO and listed in the MLS, no offers. The market has turned in both of these areas nothing is moving unless you give it away."
According to one housing benchmark, the Standard & Poor's/Case-Shiller Composite Home Price Index, the tide actually quietly turned in 2004 when growth in housing prices slowed in the 10 major cities the index follows. Robert Shiller, co-creator of the tool, which also is used by the Office of Federal Housing Enterprise Oversight, says, "That's how these markets have ended. They slow down for a while, the volume of sales drops" and, eventually, prices drop. Right now, Shiller says, in six of the ten cities in his index, home-sale prices are falling.
In August, the luxury home-builder Toll Brothers announced a 19% drop in profits and reports cancellations of building projects, particularly in Orlando, Fla.; Northern California; Palm Springs, Calif.; Las Vegas and Phoenix.
All real estate is local"All real estate is local," quips Lawrence Yun, an economist with the National Association of Realtors. What he means is that there may be unique reasons in each locale for real-estate market run-ups and declines. Or, at the least, local market forces can exaggerate the effect of national trends.
While most markets shared in the strong price increases between 2003 and 2006, many did not experience double-digit growth and astronomical home values. Now, some of those slower-growing markets seem to be insulated from the larger downturn.
Prices and sales in all regions were largely driven since 2003 by record low interest rates. That interest-rate boost is now gone, but, ironically, mortgage rates did not rise to hideous levels and currently they are dropping. On Aug. 31, the rate for a 30-year fixed mortgage averaged 6.44%, down from 6.48% the previous week and up from 5.71% a year ago, according to Freddie Mac's weekly primary mortgage market survey.
The end to the Fed's support for record-low interest rates, though, exposed underlying differences in regional markets. Those best-insulated from the downturn, says Yun, are those with affordable housing prices and growing numbers of jobs. In Texas, the Carolinas, New Mexico, Ohio, Utah and the Pacific Northwest, particularly, there is work to be had and, for those who have jobs, home prices are within reach.
In Houston, prices have risen 3% over last year -- not spectacular but, unlike in much of the rest of the country, sales there are growing. In Austin, prices rose 8.5% over last year. Salt Lake City prices grew 17%. Texas, Utah and the triangle regions in the Carolinas are basking in recovery of technology, in the movement of manufacturing from union-based Northeastern and Midwestern areas to largely non-union economies and from the rise in construction jobs that other growth brings, says the NAR's Yun.
Real estate in the Pacific Northwest is still being pumped up by fleeing Californians. Californians (retiring baby boomers in particular) see that their homes have reached record prices and they've been selling. They are flooding into neighboring states with pockets full of cash, buying homes larger than the ones they sold for prices that seem, by comparison, pretty low and, in the process, driving up prices in the Northwest, particularly in the Portland, Ore. and Seattle metro areas.
The Northwest's real-estate boom is likely to continue, albeit a bit slower, because those Californians are still moving around and also because that region's economies are strong, Yun says. Both cities are riding a strengthened technology sector. Seattle is going strong on orders for Boeing aircraft and increased international trade at its port.
How low will it go?For an economy centered on house construction, appreciation and equity borrowing, the downturn is an indisputable blow. The questions are: How long will it last and how low will it go? NAR economist David Lereah is telling Realtors that the downturn will be brief. He sees pent-up demand building as potential buyers stay out of the market, presumably waiting for prices to drop and settle. The NAR's Yun points out that the context for the housing drop is not dire, since other aspects of the economy, like job creation, interest rates and unemployment are all fairly strong.
Economist David Seiders, in his regular newsletter to the National Association of Home Builders, was soothing: He agrees that all indications "suggest that home sales and housing production still are on a downward path," but he see no recession coming. He tells the builders: "The economy still does not approach recession and a friendlier (interest) rate structure helps to keep housing activity at historically high levels."
But other analysts believe the slide "still has a long way to run," as Ian Shepherdson, chief U.S. economist for Valhalla, N.Y.-based High Frequency Economics, put it in a newsletter to subscribers. In fact, Shepherdson worries that the fast housing downturn might pull the rest of the economy down, too. He points to recent NAR data showing a big drop in pending home sales, a trend that Lereah predicts is likely to "flatten out" in months to come.
Shepherdson wrote: "The 7.0% plunge in the (NAR) pending home sales index for June is astonishing; it points to existing home sales dropping to about 5.9 (million) from the 6.33 (million) June level. … We continue to expect a 40-to-50% drop in home sales peak-to-trough, so there is still a long way to go."
Shiller wrote "Irrational Exuberance," in which he predicted a real-estate market bubble. He expects "substantial price falls in 2007 and maybe even bigger ones, continuing down for a number of years. That's the kind of pattern we've seen in the past."
That said, he cautions that he has been wrong about real estate before and it is possible the decline will turn around faster, for reasons not yet evident.
Given the information available, though, Shiller says he is worried about recession. The so-called housing ATM is no longer functioning, so people aren't spending as they were. When homeowners were borrowing heavily at low interest rates against their home equity, the nation's savings rate dropped to less than 0 in 2006. Now, Shiller says. "We don't feel so secure as we used to, especially about our properties and home. … People won't feel like such free spenders anymore."