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Personalized Home Page Setup Put headlines on your homepage about the companies, industries and topics that interest you most. After the Boom Housing Slump Proves Painful For Some Owners and Builders 'Hard Landing' on the Coasts Jolts Those Who Must Sell; Ms Guth Tries an Auction 'We're Preparing for the Worst' By JAMES R HAGERTY and MICHAEL CORKERY August 23, 2006; These optimists predicted that home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5% or 6% a year. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago. It's too early to say how hard the landing will be, but at a minimum it will be bumpy for many people who need to sell homes. And the economy as a whole, buoyed in recent years by the housing frenzy, could suffer.
David Seiders, chief economist for National Association of Home Builders, forecasts a cooling housing market. The pain that homeowners and home builders are now feeling follows a raging national house party. As Americans soured on the stock market after the tech bubble burst in 2000, they poured money into real estate, spurred on by the lowest interest rates in four decades and looser lending standards. Surging demand created home shortages in California, Florida and the Northeast. But mortgage rates began rising and surging inventories of homes for sale finally caught up with demand. Though economists had been predicting a slowdown in housing for years, many homeowners and builders were surprised by how fast the market changed. "It's just like somebody flipped a switch," says Lynn Gardner, a real-estate auctioneer who works in Northern Virginia.
"I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates." She was confident she would get something near that price, and planned to use the proceeds to buy a retirement home in Florida. But her home in the Washington suburbs attracted few serious lookers, and in March, she cut her asking price to $899,900. Finally, on the advice of her broker, she called in an auction firm, beginning a process that would eventually reveal to her just how weak the Northern Virginia market had become. In much of the country, property markets began cooling rapidly in the second half of last year. Home builders were still turning out houses at a rapid clip, and the surge of new and previously occupied homes on the market convinced buyers there was no need to hurry. Over the past year, the number of previously occupied homes listed for sale nationwide has risen nearly 40%. In some metropolitan areas, including Orlando and Phoenix, the supply has quadrupled. Investors who during the boom had been snapping up properties from the outskirts of Phoenix to the slums of Baltimore began dumping them on the market, hoping to get out with a profit before it was too late. The resulting slump, thus far, is being felt mainly on the East and West coasts and in Florida, where home prices had soared beyond the average working family's ability to pay. In California's San Diego County, the median home-sale price was $487,000 in July, down 18% from a year earlier, according to DataQuick Information Systems, a research firm in San Diego. Prices in the Northern Virginia counties of Fairfax and Arlington and in nearby towns, near Washington, averaged $537,731 in July, down 39% from a year earlier, according to the Northern Virginia Association of Realtors.
In some other parts of the country, notably Texas and the Seattle area, local housing markets remain robust. Texas' low housing costs are attracting new residents and investors, while Seattle's strong job market and shortage of homes have kept prices rising. Nationwide, the median sale price of previously occupied homes in June was 09% higher than it was a year earlier, the smallest year-to-year increase since May 1995, according to the National Association of Realtors, a trade group. Over the next few months, the median price may decline from year-earlier periods, a spokesman for the association says, something that hasn't happened since February 1993. The market may be weaker than the Realtors' widely followed monthly reports suggest. Its report on July home sales, for instance, due today, will mainly reflect sales that were agreed upon in May or June and closed in July. Moreover, when the market turns down, many home sellers initially let their homes sit instead of cutting prices enough to entice buyers. The weaker market will hurt the economy by eliminating jobs in construction and other housing-related fields and by reducing the ability of consumers to finance spending by borrowing against their home equity. Mr Sinai predicts these factors could shave as much as a percentage point off economic growth over the next year or so. Taking that into account, he expects the economy to grow at a relatively sluggish annual rate of 25% to 275% in 2007, compared with 25% in this year's second quarter and 56% in the first quarter. In a speech yesterday, Michael Moskow, president of the Federal Reserve Bank of Chicago, noted: "While we factor a housing slowdown into our outlook, there is some evidence -- such as higher rates of cancellation in home-building contracts -- that the slowdown could be more extensive." With fewer consumers applying for home loans, some big mortgage lenders are already retrenching.
KB Home, a big home builder based in Los Angeles, has eliminated 7% of its work force, or 440 jobs. In July, US home builders started construction at an annual rate of 145 million single-family homes, down 20% from the January peak. Since then, Toll has cuts its guidance four times on the number of homes it expects to close on, and its share price has fallen by more than 45%. Yesterday, the company said orders for new homes in the third quarter were down 48% from a year earlier. Mr Toll blames a "drop in confidence" among prospective home buyers, who he says are worried about "the direction of America" and the situation in Iraq. The retreat of speculators who were buying and "flipping" homes also hurt the market, he says. Such speculative buyers, who Mr Toll estimates accounted for about 10% of demand one year ago, are now sellers. Even so, Mr Toll contends that new household formation, immigration, job creation and rising affluence are currently producing a pent-up demand for housing. Once Americans believe that home prices have bottomed, he argues, they will rush back into the market, although he is unwilling to predict when that will happen.
In July, Horton reported a 21% decline in net income for the third quarter ended June 30, the first quarter in 28 years in which it didn't report year-over-year profit growth. Horton's chief executive, Donald Tomnitz, said the surge in home prices had priced many people out of the market. "Every time we've gone into a downturn in the home-building industry, they've always been longer and deeper than we've all imagined," Mr Tomnitz told analysts in a July 20 conference call. "So we're preparing for the worst, and we think this one will be longer and deeper than just the last six months." For some homeowners who bought as the market was peaking last year, the downturn is already creating a financial pinch. In April 2005, Jennifer Bloom paid about $229,000 for a condominium in Yarmouth Port on Massachusetts's Cape Cod, where her son planned to live. After his plans changed, Ms Bloom, a software specialist for a computer company, decided early this year to sell the condo. She initially listed it at $229,000, and then gradually shaved the price to $199,000 as the market weakened. Earlier this month, she gave up on finding a buyer at a price she could bear to accept. Instead, she is renting out the condo for $1,000 a month, which she...
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