Housing market just gets uglier

Wednesday, May 28th, 2008

Stephanie Armour
USA Today

With home prices falling at their fastest pace in at least 20 years, economists warned Tuesday that further declines are likely yet to come.

Prices sank 14.1% in the first three months of this year compared with the first quarter of last year, according to S&P/Case-Shiller’s national index. That’s the sharpest drop in the history of the index, which was created in 1988.

Joel Naroff of Naroff Economic Advisors says he expects prices to continue falling.

“It’s ugly,” Naroff says. “In major metro areas, we had the big (price) run-ups, and that’s where we’re seeing the record declines. … Everything is working in the direction of more price declines.”

Other economists agree. “We do think prices will drop a lot more,” says Patrick Newport of Global Insight. “We forecast another 10% drop from current levels and bottoming out in 2009.”

What’s sending prices tumbling:

Tighter lending standards. Though Fannie Mae and Freddie Mac, the government-chartered mortgage finance giants, are injecting more cash into the marketplace, cautious lenders have made it harder for buyers to get loans. The result: a swelling supply of homes for sale and a smaller pool of qualified buyers.

“Tight credit is keeping sales down,” says Mark Zandi, chief economist of Moody’s Economy.com. “Property values are falling, so (banks are) nervous. Prices have fallen so much, and they expect them to fall even more. They’re skittish.”

•Foreclosures. Mounting foreclosures are driving down home values because lenders that have taken over those properties are slashing their asking prices to try to free themselves of the homes. Competing sellers, as a result, must often lower their prices further to attract buyers.

Wary buyers. Many potential home buyers are saddled with a house they must sell first, which can be tough in this weak market. Other would-be buyers, convinced that prices will drop further, have decided it’s in their best interest to stay on the sidelines a little longer.

“Buyers don’t feel a whole lot of urgency, and that creates a problem,” says Ken Baris of Jordan Baris Realtors in West Orange, N.J. “We’re seeing many real estate businesses have closed, and many agents have left the business.”

Sales of new homes, meanwhile, inched up 3.3% in April compared with March, the Commerce Department said Tuesday. But the March sales pace was revised sharply downward, and economists say the rising supply of homes will depress new-home sales and prices in months ahead. Sales in April were off 42% from April 2007 — the steepest such fall since 1981.

S&P/Case-Shiller also reported that a home-price index it tracks of 20 major cities showed a drop of 14.4% in March compared with March 2007. Among those cities, Las Vegas was the weakest market, with a price drop of 26%. Next worst was Miami, with a 25% plunge, and Phoenix, where prices tumbled 23%.

Analysts warn that the slump will likely worsen before the outlook improves, with price declines extending into 2009 and possibly 2010. In large part, the sinking prices are a reflection of how far values had soared during the real estate boom that ended in 2006.

“We got prices up to levels that were so unaffordable — the prices needed to fall,” Naroff says. “If you’d asked 12 or 18 months ago if they needed to fall, I’d have said nationally 10% and in some areas 20% to 40%, and that’s what is happening. That’s curative.”

Zandi adds: “Inventories of unsold homes remain much too high. Prices will have to fall more to raise affordability sufficiently to work off this inventory.”


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