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Hot Homes Get Cold

Thursday, April 13, 2006 | 07:14 AM

Wednesday's WSJ was a Real Estate watchers delight: 3 articles that cut to the heart of everyone's favorite cocktail party fodder.

The most ominous was the page 1 Marketplace piece Hot Homes Get Cold. It seems that the areas which saw the greatest home price surges over the past few years -- Florida, California, Arizona, D.C., etc. are now "languishing without buyers or even prospects."

Here's an excerpt:

"Homes that just last year were selling so rapidly that they stayed on the market for just days or even hours -- condominiums on the Florida coastline, desert haciendas in California and Arizona, town houses in Washington, D.C. -- are now languishing without buyers or even prospects. Many once-booming markets are seeing double-digit declines in sales.

Home sales have been slowing for several months, but real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly market conditions have deteriorated in the past few months.

The Florida Association of Realtors reported recently that sales of existing single-family homes were down about 20% in February when compared to the same month a year ago -- and they were off as much as 47% in Naples. In California, sales dropped 15% in February compared with last year, led by a 30% decline in Sacramento, according to the California Association of Realtors. February sales were off year over year by about 19% in Washington, D.C., and down about 25% in and around Phoenix."

The reason for the slowdown is simple economics: Rising Interest Rates + Increasing Supply = Decreased Transactions.

Its not all bad: Many parts of the country are simply slipping back towards normal:

"Nationally, housing sales are a mixed picture. While nationwide sales of existing homes increased 5.2% from January to February on a seasonably adjusted basis, new-home sales dropped 10.5%. Right now, economists say the housing market will have only a modest negative impact on the overall economy, which has been robust. They note that while sales are slackening, they aren't collapsing -- they are, in many cases, simply settling into a normal market pace. Inventories are rising but they haven't reached an alarming amount. And while demand for homes is easing off in markets that previously sizzled, they are posting gains in cities where prices are still considered bargains, including Indianapolis, Albuquerque, N.M., and Houston."

Mortgage rates are at 5 year highs, and applications are falling. That crimps Demand, just as builders have created a huge surplus of inventory. Its not too hard to figure out what happens next. As transactions slow, it encourages buyers to drop prices. Its the opposite of the virtuous cycle.

The chart with the article was instructive:

Chart courtesy of WSJ

The other article worth exploring is "When to Sell an Investment Property In a Cooling Market for Real Estate" (Answer: As soon a possible). Its geared towards those speculators who got in a bit late in the cycle. The column notes the how prices eventually tend to come down:

"Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission.

Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price -- it might be the price they paid, or the price they could have got at the market peak -- and they initially refuse to accept anything less."

Lastly, have a look at the graphic of Housing Market History, 1990-2005 -- it tracks the market nationally in 5 year increments, and looks at Housing Prices, the change in those prices, and population density. Its interesting stuff.

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Update: April 13, 2006 11:25am

Amusing: How various parties see your home

Sources:
Hot Homes Get Cold
MICHAEL CORKERY
WSJ, April 12, 2006; Page B1
http://online.wsj.com/article/SB114480737150323674.html

When to Sell an Investment Property In a Cooling Market for Real Estate
JONATHAN CLEMENTS
WSJ April 12, 2006; Page D1
http://online.wsj.com/article/SB114480865922123703.html

Housing Market History, 1990-2005
http://online.wsj.com/documents/info-housingprices06.html