money.cnn.com/2006/05/03/news/economy/realestateguide_fortune -> money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/
FSB 100 Welcome to the dead zone Real estate survival guide: The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others.
Shawn Tully, FORTUNE senior writer May 4, 2006: 2:15 PM EDT NEW YORK (FORTUNE) - The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers' pockets, and ignited a building boom that bolstered the nation's economy.
These markets are already showing the signs of distress that will soon spread to the rest of the bubble zone. As interest rates rise, more homes are becoming unaffordable. Developers are offering discounts and incentives, and buyers are biding their time. The downward spiral will make the former boomtowns Dead Zones.
These cities also saw prices soar, but so far their overheated markets are still strong. They present a mixed picture: Chicago and Seattle are in only moderate danger, while LA, New York, Oakland, and San Francisco are headed for a steep fall. To make matters worse, builders keep pouring new units onto the market.
These cities between the coasts completely escaped bubblemania. Their housing prices have been rising at 3% to 7% a year, far below the double-digit gains in the hot markets. The reason: Land is cheap and plentiful, and investors are relatively rare, so the supply of new housing has kept pace with the demand even where job growth is strong, as it is now in Texas.
See the cities) SAN DIEGO Since opening in October, The Point 92103, a 48-unit condo, had sold a meager two apartments. The developers cut the list price on a one bedroom from $349,000 to as low as $299,900 and lured outside brokers with rich 5% commissions. SUBURBAN WASHINGTON, DC Brookfield Homes told Lisa Hufford that a six-bedroom colonial would cost $788,000. She started bargaining and got Brookfield to drop the price by $30,000, pay $5,000 toward her closing costs, and throw in a $14,500 finished basement.
latest official figures, for example, show both new and existing home sales rising in March, a mixed bag on prices - and a record number of new homes on the market. But FORTUNE's on-the-ground reporting - in what up to now have been some of the nation's hottest areas - paints a very different picture: Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day - so the downward pressure will only get worse.
For one thing, the vast expanse of America between the coasts was never touched by real estate mania and is in no danger of a meltdown. And even some overheated markets - including Manhattan, Los Angeles and California's Orange County - are still simmering. But things are suddenly looking very chilly indeed in four coastal cities - Boston, Washington, Miami and San Diego - as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento. So far this year, monthly sales have fallen 11 percent to 25 percent in Miami, Boston, northern Virginia and San Diego, according to local housing experts. The prognosis is even worse in Phoenix, where only 4,500 homes sold in the first three months of 2006, vs. In California it now takes six months to sell a house, twice as long as a year ago.
The problem is as basic as beams and trusses: The triple threat of soaring prices, higher mortgage rates and relentlessly rising property taxes has drastically increased the cost of ownership and put many homes out of reach for a huge number of potential buyers. In California, for example, only one household in seven can manage the payments on the median-priced house, now selling for $561,000. It takes an income of $134,000 to afford that home, which might be a modest three-bedroom ranch in a bland subdivision. The affordability gap is driving buyers to the sidelines, replacing the frenzy with a growing void as buyers wait for prices to drop. Welcome to the dead zone With houses hovering beyond the reach of most potential purchasers, formerly frantic markets grow eerily calm. People who rush to list their homes, hoping to grab a fat gain just before prices break, take them off the market. Sales shrink as buyers float low-ball offers, and sellers refuse them. There's no mystery about what it will take to close the affordability gap and bring the markets back to life: Prices will have to come down, and incomes will have to move up. Right now the ratio of home values to incomes in the bubble zones is about 40 percent above its historical average. So the only question is how much of the adjustment will come from rising incomes and how much from falling prices. In the past, housing declines almost invariably occurred while the economy was suffering through a recession. This time the housing downturn is coming during a period of strength, with GDP surging nearly 5 percent in the first quarter. If the economy keeps chugging along, household incomes should grow at around 4 percent a year. Under those conditions one likely scenario is that housing prices would drop 10 percent to 15 percent in the bubble zone over the next 12 months, then remain flat for maybe four more years while incomes catch up. For the past few years the housing boom has driven the economy, adding jobs in construction, remodeling, and real estate services. And consumers gorged on the equity in their homes, taking out a total of $2 trillion via loans, refinancings, and sales over the past five years. Those powerful stimulants, which added a full point to annual GDP growth, will soon vanish. If corporate spending or some other force doesn't come along to pick up the slack, we could go into a recession that would cut income growth to zero. Then inflated housing prices would have to shoulder the entire, wrenching adjustment, falling 30 percent or more over several years. In either case, many individual homeowners have nothing to worry about: They can simply stay put and ride out the cycle. The only thing they'll lose is the opportunity to brag about their paper profits. And in some places, appreciation has been so sharp that a seller could see prices plunge 30 percent and still make a hefty gain. The real losers will be those who bought recently at inflated prices and are forced to sell, usually because they're taking a job in another city or can't make the payments when their adjustable mortgage rate jumps. And speculators who bought overpriced condos in hope of a quick killing are going to get hosed.
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