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If you're a homeowner who pays attention to news reports about the housing market, you should be in a cold sweat. Recent headlines announced the first year-over-year drop in existing home prices in 11 years. A report from Moody's Economy.com predicted that home prices would decline in 2007 for the first time since the Great Depression.
Our advice to those who are worried about falling home prices: Relax. In 2006, the housing market continued a search for equilibrium -- the balancing of demand with supply -- and that will continue into the new year. In many cities where home prices reached the limits of affordability, prices have dropped from their peaks and have a bit more room to fall. But in many other cities, prices continue to climb.
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Our home prices tool shows price changes for existing homes in 360 metro areas as of the end of 2006. As sellers become less stubborn and lower their asking prices, median sale prices for existing homes nationwide will continue to settle down. Expect an increase of about 2% for all of 2006 but a slight decrease -- as much as 3% -- for 2007, skewed by more precipitous declines in once-hot markets.
But look at it this way: On average, the annualized increase in existing-home prices over the past five years is 5.4% -- and more than twice that in hot markets in California, Nevada and Florida. The rate of home-price appreciation in the U.S. over the past 20 years is about 4.8%, according to the National Association of Realtors. Assuming you didn't buy at the market peak, your recent returns have been ahead of the historical average.
Sales take a hit
According to the NAR, the number of home sales peaked early in 2006 and then began a gradual slide. Prices peaked a couple of months later. Buyers have been cautious because of uncertainty about mortgage rates and because they were worried that they might be buying at the top of the market. And sellers have been reluctant to trim asking prices. By September, sales of existing homes had fallen 14% from a year earlier, with a 24% drop in the West. The number of homes on the market gradually rose to one-third more than in 2005 but appeared to plateau this summer. And by September, prices finally fell -- by 2% nationwide. Single-family-home prices took the biggest hit in the Northeast, where they were off 7% from a year ago.
Homebuilders also started cutting prices aggressively in early fall and offering incentives, such as flat-screen TVs and granite countertops, to move their homes. The average incentive package is now about 5% of the purchase price. Overall, new-home prices decreased slightly in 2006 but should stabilize in 2007. Sales of condos fell even harder because of overbuilding, fleeing speculators and first-time buyers waiting for price cuts on single-family homes -- their preferred choice. In September, "months' supply" -- how long it would take to sell all the condos on the market -- had risen from 5 months to 8.6 months from the year before, and prices were off 3%.
The decline in prices nationally may seem small given the slowing market, but low mortgage rates eased the slowdown, says Bill Hampel, chief economist of the Credit Union National Association. Eventually, as many sellers decide to wait for a better environment, the number of For Sale signs will decline and the market will reach a balance between buyers and sellers.
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