Though Some Hard-Hit Cities See Signs of a Turnaround
By JAMES R. HAGERTY and RUTH SIMON
July 26, 2007
Tighter credit is prolonging a deep slump in home sales, but a quarterly Wall Street Journal survey of 28 major metro areas shows that the surge in inventories of unsold homes is slowing. In two of those markets -- Boston and Denver -- the number listed for sale has actually declined from a year ago.
The latest trends offer some hope for an eventual recovery in a U.S. housing market that generally has been cooling since mid-2005. Even so, many economists and industry executives say that recovery will be very gradual and won't start before 2008 at the earliest. That's partly because more-stringent lending policies are keeping many potential buyers on the sidelines, while others are holding off in hopes of prices heading even lower. Meanwhile, there is still a glut of homes on the market in much of the country, especially in Florida and parts of Arizona, Nevada and California.
Home sales and prices generally should bottom out around mid-2008, says Mark Zandi, chief economist at Moody's Economy.com, a research firm in West Chester, Pa. "The market will not revive quickly, however," he says. "It won't be until the turn of the decade before housing activity returns to more normal conditions."
The message for home sellers is that they need to be flexible on price and may have to spruce up their house to stand out against plenty of competition, including from builders desperate to shed inventory. In Atlanta's southwestern suburbs, builder Winstar Neighborhoods is offering free Chevrolet Aveo subcompacts to buyers of certain new homes. Given the glut, buyers in most markets can take their time and bargain hard on price.
Yesterday, the National Association of Realtors reported that sales of previously occupied homes in June were down 3.8% from the prior month to a seasonally adjusted annual rate of 5.75 million. The number of homes listed for sale nationwide was 4.2 million, up 12% from a year earlier but down 4.2% from May, the Realtors said. The median home price was $230,100, up 0.3% from a year earlier.
Median prices can be skewed by shifts in the market, however. Lenders are turning down more and more people with weak credit records or high debt in relation to income, and that is hurting sales of lower-end homes. Jeffrey Mezger, chief executive of KB Home, one of the nation's largest mass-market builders, says its average home price has fallen about 12% from a year ago. In some markets, such as Southern California, he says, "there are two markets emerging." While the high-end housing market has remained strong, prices are down in the entry-level and first-time move-up market.
As measured by the S&P/Case-Shiller national index, house prices in this year's fourth quarter are likely to be down about 7% from a year earlier, says Thomas Lawler, a housing economist in Vienna, Va. He expects a further fall of about 3.5% in 2008.
Yet the picture varies greatly by region and even by neighborhood. The well-heeled can still get loans on attractive terms, and demand has held up far better for homes in desirable neighborhoods near city centers than for homes in more distant and humdrum suburbs. In the San Francisco Bay area, prices have continued to rise briskly in Marin County, a posh area with fairly short commutes to the city, and Santa Clara County, buoyed by hiring at Silicon Valley firms, says Scott Kucirek, general manager of Prudential California Realty. But prices generally have fallen in Solano County, which is a longer commute and has more new construction and entry-level homes.
But tight credit is squeezing lots of people still trying to buy a first home. William and Kimberly Glass were preapproved for a mortgage in May and found a $540,000, four-bedroom, three-bathroom home in Santa Clarita, Calif., near Los Angeles. But by the time they made the offer, lending standards had tightened to the point where they could no longer buy the home with no money down. "It's a little frustrating that a month and a half ago we were in a better position than we are now," says Mr. Glass, an actor. Putting "3% to 5% down would have basically drained our savings and put us in a precarious position with the renovations [the house] needed."
Lenders, under pressure from regulators and investors, are continuing to tighten the screws. Countrywide Financial Corp., J.P. Morgan Chase & Co., National City Corp. and others are making it tougher for borrowers to finance 100% or even 95% of their home's value by combining a home-equity loan or line of credit with a mortgage. Lenders had earlier cut back on such loans to borrowers with weak credit records and are now tightening standards for borrowers with better credit profiles, particularly those who aren't documenting their income and assets.
National City has been tightening standards for home-equity loans every month or so in an effort to stay one step ahead of its competitors, says E. Kennedy Carter Jr., an executive vice president there. "We don't want to be the last girl at the dance when it comes to credit quality." With home prices falling, he says, lenders are moving closer to standards set earlier in the decade, when most required at least a 10% down payment.
On Tuesday, Countrywide blamed its 33% drop in second-quarter earnings largely on sharply higher defaults on home-equity loans, particularly those made to borrowers who had little money for a down payment.
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One three-bedroom condo in this Orlando, Fla., building, listed at $749,000, has been on sale since March.
Lenders are adopting federal guidelines for nontraditional mortgages, making it harder for borrowers to qualify for mortgages that allow them to pay interest but no principal in the loan's early years, or make a minimum payment that may not even cover the total interest owed. Lehman Brothers Inc.'s Aurora Loan Services unit put the guidelines into effect over a six-month period beginning in December, and Wells Fargo & Co. said it will do so in August. Fannie Mae and Freddie Mac, which purchase loans from lenders and package them into securities, will apply the guidelines to loan applications beginning in September.
"The noose is definitely tightening" around interest-only loans and option adjustable-rate mortgages, two products that were often used by cash-strapped borrowers to make their loan payments more affordable, says Brian Chappelle, a mortgage banking consultant in Washington. About one-third of borrowers who have used these loans in recent years wouldn't qualify under the tighter standards, he says.
House prices are likely to remain weak in many areas until inventories of unsold homes fall. That process has begun in a few places, including the Boston metro area, where the number of homes listed for sale at the end of June was down 16% from a year earlier. Boston's market cooled in early 2005, before most other areas, and so has had more time to adjust. Some frustrated sellers who don't need to move have taken their homes off the market.
The fall in inventories is a "hopeful sign," says Timothy Warren Jr., chief executive of Warren Group, a financial publisher in Boston, but he thinks sales won't begin rising again before next year. Sales of single-family homes in Massachusetts as a whole in the first half of this year were down 4.3% from a year earlier, and the median price declined 3.6%, to $318,000, according to Warren.
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In the Denver area, the number of homes listed for sale is down 5% from a year ago. Contrary to the national trend, Denver's housing market began cooling in 2001 amid losses of jobs in technology and telecommunications. Job growth in the Denver metro area lagged the national average from mid-2001 through late 2004, but has since been above average. "The market is recovering," says Jeff Bernard, a Denver real-estate broker and developer.
But inventories have continued to bloat in Florida, where a speculative binge has led to an enormous glut of condos. Miami-Dade County has enough condos on the market to last 31 months at the current sales rate, says Esslinger-Wooten-Maxwell Inc., a big real-estate brokerage firm there. Still, the rate of increase in unsold homes in the Miami area has slowed recently, says Ronald Shuffield, president of the firm.
Atlanta's inventory of unsold homes is up 43% from a year ago, according to Smart Numbers, a local research firm. It says there are enough homes on the market to last more than 10 months at the current sales rate, up from six months a year earlier. "We haven't hit the bottom yet in Atlanta," says Steve Palm, the firm's chief executive. Job growth in Atlanta remains strong, but many of the jobs aren't very high-paying, Mr. Palm says.
Lewis Glenn, president of Harry Norman Realtors in Atlanta, says he believes lots of potential buyers are waiting to see whether prices will come down. Some of them are marooned because they can't sell their current homes for what they consider a fair price -- or enough to pay off their mortgages.
In the Seattle metro area, the number of listings is up 55% from a year ago. But inventories were unusually lean there last year, and the market is now regaining balance.
In the New Jersey suburbs near New York, listings surged in 2005 and 2006. At the end of June, though, listings in 12 northern New Jersey counties were up just 3% from a year ago, according to Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. In Manhattan, inventories are down 17%, according to Corcoran Group, a real-estate brokerage. A torrent of Wall Street bonuses and foreign buyers lured by the weaker dollar have helped keep the market firm there, says Jonathan Miller, chief executive of Miller Samuel Inc., an appraisal firm in New York. The median sale price for co-ops and condos in Manhattan was $895,000 in the second quarter, up 1.7% from a year earlier, according to Miller Samuel.
Jeffrey G. Otteau, president of Otteau Valuation Group, says the parts of New Jersey popular with commuters into New York are doing best. In those areas, he says, sales are no longer slumping and the number of homes on the market has leveled off. "Proximity to Manhattan is once again becoming the primary force in the market," he says.
--Joseph De Avila contributed to this article.
Write to James R. Hagerty at bob.hagerty@wsj.com and Ruth Simon at ruth.simon@wsj.com
