From the Wall Street Journal:
The State of the Slump
Tighter Credit Helps Keep Housing Inventories Rising,
Though Some Hard-Hit Cities See Signs of a Turnaround
By JAMES R. HAGERTY and RUTH SIMON
July 26, 2007; Page D1
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.”
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.
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.”
“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.
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.