Smart Buying
What's Your House Worth?
This time it's for real: The hot housing market is gradually cooling down. To see how moderating price hikes affect your town, check our survey of 100 cities.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, January 2006
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At last, sanity is returning to the housing market. Appreciation is still strong -- in fact, median U.S. home prices in 2005 will surpass 2004's gain. But forecasters expect the pace to moderate in 2006, closer to the historical average of 4% to 6%. For homeowners, that's still an inflation-beating return. Home buyers can expect a retreat from the bidding wars and no-contingency offers that have kept many on the sidelines. And sellers will have to expend more effort to snag a fair price.
Economists have been predicting the return of moderate appreciation for several years in a row. But this time, there's growing evidence they might be right. First, the inventory of existing homes for sale edged up in 2005. It's not yet at an equilibrium between sellers and buyers, but it's getting closer. Second, the National Association of Realtors expects total sales of both existing and newly built homes to decline in 2006. Third, the inventory of condos and co-ops for sale made a huge leap in the past year -- by almost 25%.
Mind you, few experts are predicting a market crash. Economists, including Ben Bernanke, the likely new chairman of the Federal Reserve, cite strong fundamentals that support the housing market, including steady growth in jobs and income, plus historically low mortgage rates (even though rates have begun to climb). Continuing growth in the number of households means more buyers. And limits on home building in some areas will also keep demand strong.
But sooner or later any run-up in prices runs out of steam. In one scenario, price appreciation in overheated markets (mostly on the coasts) will slow and prices may even decline, while less-frenzied markets will continue to pick up speed. Gary Taylor, 44, and Melody Wofford, 50, are already caught between those two worlds. They are trying to sell their current home in Geneva, Ill., 40 miles west of Chicago, and return home to family and friends in Nashville. In 2003 the couple purchased their 1917 Craftsman Foursquare house for $365,000. Last September they put it on the market for $474,000. In November, they reduced the price to $465,000 but still had no offers. "People say, 'great house,' but they're not ready to buy. I think they're waiting until the new year to see what will happen to the market," says Taylor.
The couple can't afford another drop in the price of their Chicago home because prices in Nashville have been chugging higher in their absence. They believe their former Tennessee home would cost as much as $100,000 more today than it did when they sold it in 2003. Plus, they're hoping to make a hefty down payment so they can afford payments on a 15-year fixed-rate mortgage.
It's different this time
Given their inaccurate predictions of price slowdowns in the past, why should we believe housing economists this time? That's exactly what they asked themselves at the fall forecast meeting of the National Association of Home Builders. Mark Zandi, chief economist and co-founder of Economy.com, an independent research firm, confessed that he had been "dead wrong" for the past two years. He cited three reasons: He believed that mortgage rates would rise, and they didn't. He underestimated the creativity of mortgage lenders, who came up with affordable new variations on adjustable-rate themes. And he failed to anticipate the persistence of real estate investors.