Housing Glut Gives
Buyers Upper Hand
As Spring Home-Shopping Season Looms,
Supply Mounts and Prices Fall in Some Areas;
Builders See Slow Recovery
By JAMES R. HAGERTY and RUTH SIMON
January 25, 2007
Amid a continuing glut of homes for sale in most of the country, buyers should have plenty of choices and lots of bargaining power in the spring selling season -- typically the busiest time of the year.
Many builders and real-estate brokers, for their part, hope the housing market will start recovering this year as buyers respond to price cuts and other sweeteners offered by increasingly nervous sellers. In some markets, agents say, buyer traffic has picked up in the last month or two.
But any recovery is likely to be gradual. Donald Tomnitz, chief executive officer of D.R. Horton Inc., a home builder, told investors this week that the market, which began slumping in 2005, may bottom out by mid-2007, but that "we don't see any rapid improvement thereafter."
Given all that, sellers should expect buyers to take their time and be tougher negotiators. David Lee, who recently moved to Wenham, Mass., to take up a post as an associate professor of physics at Gordon College, has rented a home for his family and says they plan to be "quite picky and choosy" as they look for a home to buy. Dr. Lee doesn't feel any pressure to decide quickly because he figures prices won't rise in the near term and could fall further.
A quarterly survey of housing conditions3 in 28 major metropolitan areas by The Wall Street Journal showed that the inventory of unsold homes at the end of 2006 was up substantially in nearly all of the markets from the already plentiful level of a year earlier. The biggest increases were in the metro areas of Miami-Fort Lauderdale, Orlando, Tampa and Jacksonville, Fla.; Phoenix; and Portland, Ore. (Unlike the other cities, Portland had a lean supply of homes a year before.)
The survey also includes recent pricing trends -- nearly all negative -- based on surveys of real-estate agents by Banc of America Securities in New York, a unit of Bank of America Corp., as well as data on late mortgage payments and job-creation prospects from Moody's Economy.com, a research firm in West Chester, Pa. Employment figures have a huge effect on housing demand.
Home-price trends vary greatly from one region to another and even within metro areas. For instance, housing demand remains weak in the Detroit area, sapped by auto-related job losses, while the chic urban zones of San Francisco and Manhattan -- where space for new construction is extremely limited -- generally have stayed firm, though price appreciation is far slower than a year or two ago.
The good news for home sellers is that unemployment remains low in most areas, wages are growing and energy prices have fallen from their recent peaks. What's more, mortgage interest rates are still low, allowing people with good credit records to obtain 30-year fixed-rate loans at around 6.2%.
But many lenders are growing more cautious about how much debt home buyers should be allowed to take on and more inclined to ask for proof of income. This tougher attitude will exclude some marginal buyers from the market, hurting demand, even as a rising number of foreclosures throws more supply on the market. DataQuick Information Systems, a research firm in La Jolla, Calif., said yesterday that mortgage lenders sent 37,273 default notices to California homeowners in the fourth quarter, up 145% from a year earlier and the highest in more than eight years.
Meanwhile, home builders still have lots of unsold homes that they will unload by further cutting prices and dangling such incentives as help with closing costs or kitchen upgrades. Discounts on new houses, in turn, will make it harder for some sellers of previously occupied homes to attract buyers.
Some of the biggest gluts of new homes are in Florida, Phoenix and the outer suburbs of Washington, D.C., says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group. Many of the gluts are due to frantic building of condominiums over the past few years. The supply of condos listed by real-estate agents is up 86% from a year earlier in the Las Vegas metro area, 43% in Washington, D.C., and 21% in the Northern Virginia suburbs of Washington. In Florida's Miami-Dade and Broward counties, the listed condo supply has more than doubled from a year earlier.
In Miami-Dade, the number of existing condos on the market is enough to last 27 months at the current sales rate, says Jack McCabe, a real-estate consultant in Deerfield Beach, Fla. The oversupply will grow, he says, as about 8,000 condos are expected to be completed this year and 12,000 in 2008.
"It's going to get bloody down here," Mr. McCabe says. He estimates that condo prices in Miami-Dade fell between 8% and 10% last year and will drop 20% in 2007. Eventually, he predicts, hedge funds and other investors will step in to buy surplus condos in bulk at huge discounts.
10,000 Condos for Sale
In California's San Diego County, developers have more than 10,000 condos available for sale in new buildings, projects under construction or properties being converted from rentals, says Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a consulting firm based there. He says that supply is enough to last more than 20 months at the current sales rate. That number excludes several thousand condos being offered for resale by speculators and others.
Mr. Dennehy estimates that condo prices have fallen at least 15% to 20% in the county over the past year, though it's hard to measure price changes because sellers often give incentives such as free upgrades or help with closing costs that aren't reflected in the price.
In the Boston area, lower-priced homes in blue-chip neighborhoods are moving pretty quickly. But ones that are overpriced or located on main streets are languishing, says Sam Schneiderman, broker-owner of Greater Boston Home Team. "It's got to be a really good deal," he says. "An OK deal doesn't quite cut it. Buyers are holding out."
The glut in inventories is likely to increase in some markets as sellers try to take advantage of what they hope will be a stronger selling season. Some sellers pulled their homes off the market late last year, intending to relist them in the spring.
At the Coldwell Banker Residential Brokerage office in Scottsdale, Ariz., near Phoenix, listings are up roughly 30% since the end of December. The office expects listings to increase further in late February and early March as sellers who pulled their homes off the market before the holidays relist them.
Some of last year's strongest housing markets now are showing signs of cooling a bit. In the San Francisco Bay area, the median price paid for new and resale homes in December was $612,000, up just 0.5% from a year earlier, according to DataQuick. But prices fell in parts of the Bay Area; they were down 6.3% from a year earlier in Sonoma County and down 5.1% in Solano County, DataQuick says.
One of California's weakest markets last year was the Sacramento area. Anthony Graham, an analyst at Trendgraphix Inc., a provider of housing data, says sellers of previously occupied homes there have had trouble competing with the huge discounts and incentives offered by builders.
Mr. Graham expects average home prices in the Sacramento metro area to fall between 6% and 8% this year, but believes the market will begin to recover modestly by the fourth quarter, assuming that home builders continue to cut their production. Greg Paquin, president of Gregory Group in Folsom, Calif., which gathers data on new home construction throughout the state, also thinks Sacramento is stabilizing after last year's price cuts. "Buyers who were on the fence are starting to say, 'Hey, this is a pretty good deal,' " Mr. Paquin says.
California's Central Valley, which includes such cities as Bakersfield, Fresno, Merced and Stockton, may take longer to absorb excess new-home inventory and bring prices down to more affordable levels, Mr. Paquin said. He said that area may not bounce back until next year.
In Manhattan, big bonuses recently doled out by Wall Street firms will help support the market in this year's first half, says Jonathan Miller, chief executive officer of Miller Samuel Real Estate Appraisers in New York. But a rash of new condo developments will help moderate prices. He expects price increases this year to average 5% to 6% in Manhattan. On Long Island, he believes prices are likely to be flat to slightly higher this year.
In New Jersey, "I'm optimistic that home sales will begin to rebound in the spring," says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. "However, that would signal the end of the decline -- not a return to higher prices."
Mr. Otteau figures home prices fell an average of about 10% in New Jersey last year. For 2007, he believes homes costing less than about $600,000 are likely to rise modestly, around 3%, while homes above that level are about flat. In the luxury end of the market, prices may edge down again this year, Mr. Otteau says.
In the Chicago area, some homes that have sat on the market are finally moving, says Barbara O'Connor, an agent with Baird & Warner. But some sellers have had to accept far less than they had hoped for. Jody Andre, a restaurateur, put her three-story Victorian-style home in the Edgewater neighborhood on the market in August at $679,000. She later lowered the price to $634,900 but still got no offers. "This is a hot neighborhood and a lot of people couldn't understand why the house didn't sell," says Ms. Andre, who accepted a $605,000 offer last week. "I waited too long to put it on the market," she says.
Buyer Traffic Picks Up
The end of the year is normally a slow time, but in some parts of the country traffic has increased in the last month or two, helped by unseasonably warm weather. In Philadelphia's Center City, buyer traffic began to pick up in November and has continued to climb over the last two months, says Mike McCann, an associate broker with Prudential Fox & Roach, Realtors.
A recent open house for a three-bedroom home priced at $469,000 drew 17 parties, Mr. McCann reports. In the summer and early fall, he says, "we didn't want to do open houses because it was a wasted day." Sales are also increasing, but negotiations are taking longer and many offers are contingent on the buyers selling their current homes, Mr. McCann adds. Prudential Fox & Roach is also seeing more people asking to get pre-approved for a mortgage, a sign that they may be ready to buy.
In Atlanta, where the housing market began to soften in August, business started picking up again in December, says Lewis Glenn, president and chief executive of Harry Norman, Realtors. "There's more negotiation," and builders are cutting prices and offering concessions, such as buying down the borrower's mortgage rate, he says.
In Scottsdale, some sellers are cutting prices by 10% or more, says Dale Pavlicek, sales manager for the Coldwell Banker Residential office there. "There are a lot of vacant homes on the market," he says. Sellers who bought in the past year or two are barely breaking even or are coming to the closing table with money to pay off their mortgage and other costs, he adds.
Houston remains one of the nation's more buoyant housing markets, supported by job growth in the energy industry. Rob Cook, chairman of the Houston Association of Realtors, says the supply of homes on the market is enough to last about six months at the current sales rate -- what he calls a "balanced" market. Prices are rising only modestly, though, because Texas has plenty of room for new construction. "We just keep expanding out farther and farther," Mr. Cook says.
