Last strains of the US housing crescendo
Fewer bidding wars and slower sales indicate rationality is returning to the housing market.
PALO ALTO, CALIF. — This leafy suburb, also known as the heart of Silicon Valley, has been on the nose cone of the nation's real-estate rocket the past couple of years.
"For sale" signs seemed to come with "sold" already attached. Homes often fetched 20 or 30 offers, the winning ones offering hundreds of thousands of dollars above asking price, with a few stock options, theater tickets, or other goodies thrown in to sweeten the bid.
But this spring, the pace is throttling back from torrid to brisk. Indeed, here and across the nation, there are tentative signs that the real estate market is gradually beginning to slow.
Sales are easing back from their record pace, inventories are increasing, and in markets like Silicon Valley - where the median price tops the nation for a major metropolitan county at a cool half-million - the atmosphere is shifting from near psychosis to greater rationality, say analysts.
That's not to say housing prices are dropping. To the contrary, forecasts are for a hefty increase in median home prices this year.
But conditions are unfolding that could lay the groundwork for a slower rise in prices by the end of the year.
"More sellers are placing their homes on the market, so the tight housing situation we've seen in many areas of the country is now beginning to ease," says Dennis Cronk, president of the National Association of Realtors.
Even here, where real estate agents carry Kleenex for distraught buyers, things are improving, says Penny Pompei of the Silicon Valley Association of Realtors. "We're finally seeing a normalization. Last year this was the best market nationally in terms of sales," says Ms. Pompei. "But in the last few weeks there has been a huge shift." The shift: slower-paced sales, more choices, and more gradual price rises.
Leslie Appleton-Young, chief economist for the California Association of Realtors, puts it this way: "The market is transitioning from a boil to a simmer."
Nationally, signs of better days for home buyers are multiplying. Last week, the Commerce Department reported that the annual rate of new single-family-home sales in April was down 6 percent from March.
Sales of new homes declined in the Midwest, South, and West, with only the Northeast recording a gain. Slower sales represent slackening demand, which ultimately tempers prices.
Sales of existing homes, which represent a larger share of the market than do new homes, were more than 7 percent lower through the first four months of 2000 compared with the January through April period a year ago.
Also showing a downward trend are single-family building permits - down 4 percent for the January to April period compared with 1999 - and single-family construction starts, down a little more than 1 percent.
The National Association of Home Builders (NAHB) tabulates a monthly Housing Market Index, based on builders' current sales as well as their expectations for the next six months.
That index has dropped from 71 in January to 63 in May. The index reached an all-time high of 78 in late 1998 and hovered around the mid-70s for much of 1999.
"An increasing number of builders are reporting that interest-rate increases are resulting in reduced buyer traffic and that their expectations of future sales have weakened," said NAHB president Robert Mitchell recently.
Most of the causes of the subtle weakening in the housing market are the traditional ones. Federal Reserve Board Chairman Alan Greenspan has been nudging up interest rates for months, and those gradual hikes have worked their way into mortgage rates. A fixed 30-year mortgage is more than 1 percent higher now than a year ago and forecast to keep edging up to near 9 percent by the end of the year.
Through much of the past year, the housing market seemed to ignore rising mortgage rates. But as Steve Berman of the Commerce Department says, "interest rates do, eventually, matter."
Beyond interest rates, the double-digit leaps in prices in many markets over the past year have simply shut out many buyers. The percentage of Americans who can afford the median price of a home in their local areas has been declining;the nationwide figure now stands at 52 percent. In California, it has dropped to 30 percent.
As a result of higher rates and record prices, Pompei of the Silicon Valley Association of Realtors says buyers are more picky and less willing to get into bidding wars.
Greater selectivity is aided by greater choice, and here as in many markets across the country, inventories have grown. Some analysts speculate that more homes are on the market because many sellers want to capture record prices while they last.
Whatever the cause, in Palo Alto, a grand total of four homes were for sale in January, compared with 40 today. And even in the hot Silicon Valley market, the average sale now takes 30 days, compared with five a year ago.
Aside from interest rates and supply, the stock market has gradually become a greater influence on the housing market. The New Economy boasts many more middle-class stockholders, and, as the markets bounce up and down, greater uncertainty has crept in. That has made many wary of buying, and those who do are more careful.
And in Silicon Valley, the spectacular success of many young technology start-ups has made the market's performance even more important to housing. When initial public offerings (IPOs) were producing huge increases in stock values last year, that overnight wealth was often being invested in real estate, sometimes in bidding wars that had more to do with winning than with the value of the property, say real estate agents.
But just as IPOs have slackened and the worth of many technology-company shares subsided, in recent weeks the bidding wars have toned down. Many homes are being sold at lower premiums and, says Pompei, in mock astonishment, "Some are even selling below asking price."
(c) Copyright 2000. The Christian Science Publishing Society