First came a slowdown in the volume of home sales. Now prices are falling, and the question for anyone selling, buying, or even just hanging onto a home is: How far and how fast?
The expert consensus: The slump could last into the summer of 2007. And the speed could depend on how many people hit the panic button or take their homes off the market.
Last month, the median price of a single-family home was down from a year ago – the first significant national decline in 13 years, according to tracking of previously owned homes by the National Association of Realtors. This August, the median price for all housing types was $225,000, down 1.7 percent from August 2005, when the median was $229,000, the realtors' group reported Monday.
Historically, it's rare for prices to sink very far nationally even when recessions occur. The National Association of Realtors (NAR) predicts a return to stability next year. But some economists are forecasting a tougher climate, thanks to an extraordinarily large run-up in prices in the past couple of years and homebuyers' increasing reliance on exotic new types of mortgage loans. Merrill Lynch predicts a 5 percent home-price drop in 2007, while Goldman Sachs, another New York investment firm, forecasts a 3 percent decline nationwide.
"The housing market is weak and getting weaker," says Mark Zandi, chief economist for Moody's Economy.com. "It appears the downturn has a ways to go."
After a five-year boom in the housing market, where home prices head from here could have a significant impact on the direction of the economy and on the pocketbook finances of millions of families. But economists differ in their forecasts of how the current real estate cycle will unfold.
NAR has taken a largely upbeat view. "This is the price correction we've been expecting – with sales stabilizing, we should go back to positive price growth early next year," NAR economist David Lereah said in a statement accompanying Monday's numbers.
The volume of sales barely budged in August, closing the month at an annualized pace of 6.3 million existing-home sales, the report said. That suggests some possible stabilizing after months of declines in the number of units sold. Home sellers may finally be settling for lower prices rather than letting their homes sit on the market.
Pessimists say a speculative "bubble" had built up and now needs to unwind – possibly over several years.
"As draconian as that sounds, a 5 percent price decline would only reverse one-tenth of the price run-up over the previous five years," Merrill Lynch economist David Rosenberg wrote in a recent report.
"Additional price declines should not be surprising," says Asha Bangalore, an economist at Northern Trust Co. in Chicago. "We have a recession in the housing market.... Usually it takes two to three years to stabilize."
She points to a rising supply of homes on the market. There are now enough homes on the market to meet demand for 7.5 months, up from 7.3 months supply in July, Dr. Bangalore says. The last time inventories surpassed current levels was in October 1992, during the last housing downturn.
Economist Richard DeKaser of First National City Corp. in Cleveland says the decline in sales volume is only about half-way done. So far, he reasons, existing-home sales have fallen about 12.6 percent on a year-over-year basis. "On average, they have fallen on the order of 25 percent," he says. "This suggests we're about halfway there, and by late next year, this should be over."
Though the housing numbers are bad, the rate of decline may be slowing. "The fact is that the decline is showing signs of losing momentum, not gaining momentum," says Bob Brusca of FAO Economics in New York. For example, the decline in the August sales volume was less than economists had been expecting, he says. "We can't say it's a turning point, but we can say it's an inflection point."
He expects the downturn to continue for another year, but at a slower pace. And he's not concerned about the drop in home prices, because during the past three years, the median price of houses is up 27 percent, and the average price of a home is up 20.9 percent.
"Even though prices have fallen, people still have a lot of wealth and equity built up," Mr. Brusca says. "We would need to see a lot more decline before it materially impacts consumer finances."
One new uncertainty in this cycle is today's greater reliance on adjustable-rate mortgages. With the interest rates on those loans shifting upward, a key question is how many owners will have to unload homes they bought during good times when values were rising and interest rates were low.
"The probability of a more disorderly correction is raised by this element," says Bangalore of Northern Trust.
The decline in last month's prices of new homes on a seasonally adjusted, year-over-year basis is the first such drop since February 1993, except for a very slight blip on a seasonally unadjusted basis in April 1995.
Prices may continue to fall, since many of the leading economic indicators have continued to weaken.
The home builders' sentiment index is continuing to decline, as are the number of pending sales of existing homes. Applications for mortgages also remain soft. And the inventory of unsold homes continues to rise, now up to 3.9 million homes, about double what it was in 2003 during the height of the housing boom.
"The rising number of unsold homes reflects the home sellers who were hoping to cash out at a high price and have kept their homes on the market for an extended time," says Mr. Zandi.
Some of these trends are likely to continue, until next summer, says Zandi, when he expects to see housing start to stabilize. With such a long period of weakness, he says, it's beginning to look as if home prices might fall in 2007 by about 5 percent on a year-over-year basis. "This would be the first calendar-year decline since the Great Depression," he adds.