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
Now, says Zandi, those forces are becoming "less potent." Interest rates on 30-year fixed-rate loans have begun to rise, and they could reach 7% or more by the end of 2006 -- a level at which most economists agree that buyers could begin to put the brakes on home purchases. Zandi says lenders are beginning to self-regulate and to become less aggressive in courting buyers, and they may find it difficult to come up with the next new thing. And he thinks investors in many "juiced-up" markets sense that the markets are topping out, especially when it comes to high-end condos.
In the past, you could assume that as long as there were plenty of jobs, home prices wouldn't decline. Not anymore, says David Stiff, chief economist at Fiserv CSW, which supplied the figures in the database we have compiled. Those two factors came unlinked during the recession of 2001, when home prices continued to climb as unemployment rose. Now buyers may not be able to afford the big run-up in home prices despite a growing number of jobs.
Zandi says markets in which home prices have appreciated significantly above their historical averages are seriously overvalued. In that group he now includes all of California and Florida, much of the Northeast corridor (from Boston to Washington, D.C., excluding Philadelphia) and parts of the markets in Minneapolis-St. Paul and Chicago. Those areas account for almost half the value of the nation's housing stock -- up from about one-third in late 2004. If all those markets cool off at the same time, loss of construction jobs, waning confidence among homeowners and consumer belt-tightening could have widespread repercussions, provoking a nationwide slump in housing prices. When might we see prices fall? Zandi ventures a vague guess -- within two to three years.
But the longer the party goes on, the worse the hangover will be.
Precarious perches
Among the metro areas Zandi identifies as most at risk for declining prices is Bakersfield, in California's Central Valley, where coastal Californians have flocked to find relatively affordable housing -- a median price of $235,000, versus $544,000 for the state of California as a whole. Although the city took first place in the U.S. for annualized price appreciation over the past three and five years, it fell to third, tied with Naples, Fla., in one-year results. Local real estate agent Charles Doremus confirms the loss of momentum, though he says it's like "going from 200 miles per hour to 180."
Another of Zandi's at-risk cities is Pensacola, on the Florida panhandle. The region hasn't garnered nearly as much bubble press attention as south Florida, but the loss of homes to Hurricane Ivan in September 2004 has fueled double-digit appreciation, and in some communities, prices have gone wild.
In Fort Walton Beach, about 40 miles to the east, growth in population and jobs are the drivers. In CSW's one-year results, Fort Walton Beach-Destin took first place, with price gains of 49%. Fort Walton Beach's mayor, Mike Anderson, says the town and its white-sand beaches have finally been discovered. But local real estate agent Cindy Purves says a slowdown began about midyear and describes the market as returning to sanity from insanity.