The housing market slowdown is nationwide, yet it has taken its earliest toll in Midwestern communities where the word "boom" never applied to home prices.
Here in the northern Indiana city of South Bend, where "For Sale" signs sparkle alongside golden foliage in the autumn sun, the median price of a resold home is $101,000 – less than half the national average.
Some forecasters say that coastal communities, from California to the Eastern seaboard, may in the end see the sharpest downturn in prices. But it is this region, characterized by slow job growth and gathering problems in the automotive industry, that has stumbled first. In a business where outright price declines are rare, the Midwest was the first region in recent years to post a drop in prices – with median single-family homes down 2 percent in the second quarter from the same period in 2005.
Is the Midwest leading a national downturn? Prices were still rising in the South, West, and Northeast, although they too may show declines when the National Association of Realtors provides third-quarter numbers this month.
"Those [Midwestern] markets are being affected more by the economy itself ... particularly job cuts," says Brian Carey, an economist at Moody's Economy.com, which tries to model where home prices will go next in US markets. The coasts, by contrast, "had the largest housing boom ever basically. We're starting to see the downside come through now."
The regional and city-by-city differences reveal how, in real estate, it really is "location, location, location" that matters.
In the Midwest, home-price patterns are all about the economy and jobs. Cities such as Detroit, Cleveland, and South Bend are struggling even though they never had a big run-up. In other regions with stronger economies, the housing shift is driven by consumers adjusting to higher interest rates and by speculators who are now backing out of the market instead of bidding prices up.
Some economists believe that, with interest rates apparently stabilizing, the worst of the downturn may be over for most of the nation. But others, including Mr. Carey, say it's likely that the great boom will take longer to unwind. From Merced, Calif., to Naples, Fla., he says many cities could see double-digit price declines that don't end until late next year or even 2008 and 2009.
The uncertainty is greatest in coastal areas and other hot markets such as Las Vegas, due to the unusual nature of their recent price surge.
"This boom that we just went through in housing prices is actually unprecedented," says Jeannine Cataldi, a senior economist at Global Insight.
What's happened is an extraordinary surge in land values on the coasts, from Washington, D.C. to San Diego, driven by low interest rates, a strong economy, and creative financing options such as interest-only mortgages with no down payments. But after years of double-digit price appreciation, few economists think that kind of pace can be sustained in the future.
"I don't think they're going to see [price] declines, because they have such healthy population growth and economic growth," says Ms. Cataldi in Philadelphia. But housing prices can only go so far before working people can't afford a dwelling. "They're having a hard time recruiting workers" in some high-priced cities, she says.
In many inland areas, especially the industrial heartland of the Midwest, the problem is the opposite. Land is relatively cheap. It's jobs and people that are needed.
Here in South Bend, realtor Bruce Gordon says a weak economy with state property tax hikes have dampened housing.
"It's a way different market, towards the bad side," from just a couple of years ago, he says. Some communities are doing well, thanks to good schools or newer homes, but in many parts of town homes are listed at $50,000 or less – and aren't selling.
One home is listed for such a low price – $17,500 – that the monthly mortgage payment would be about $87, about the same as the property tax.
"Our suburban areas have still done pretty well," Mr. Gordon says. But "we've never had huge appreciation."
Indeed, in much of middle America, where land isn't scarce as it is on the coasts, cities often have seen land values barely keep pace with inflation – or in some cases not even do that. But in general, whether home prices are high or low, they are what economists call "sticky." Once they go up, they tend to stay up, except during tough times such as a recession.
The National Association of Realtors, for example, sees US housing markets basically taking a pause. For the next few quarters, most regions could see modest price declines, but the association predicts a 1.5 percent rise in median home prices for the 2007 calendar year. But economists are divided over whether prices will go up or down next year. They see vulnerability for specific cities. Coastal boom cities are most at risk in rankings developed by PMI Mortgage Insurance Co. in Walnut Creek, Calif.
"We continue to believe that it will be an orderly slowdown," says Mark Milner of PMI. "The economy in the country appears solid."