Real Estate

Glimmers of Light on Home Prices

Sales are ticking up, but don’t expect prices to follow until the middle of the year.

By Pat Mertz Esswein, Associate Editor

From Kiplinger's Personal Finance magazine, January 2010

In the second half of 2009, the housing market seemed to catch its breath after struggling to recover from the most severe downturn since the Great Depression. The first-time home buyer’s tax credit and low mortgage rates lured buyers who’d been dithering and helped move the glut of foreclosures that have been dragging down home values. Sales began ticking up, and home prices stabilized after a three-year downward spiral.

But the correction isn’t over yet. Credit is still tight, unemployment is high, and more foreclosures are coming. Even with the extension and expansion of the tax credit to include move-up buyers and an upward trend in sales, home prices will continue to edge lower through next spring. The U.S. housing market won’t begin to look healthy again until at least 2011.

The price picture

From the beginning of the downturn in mid 2006 to June 30, 2009, the median price of an existing home nationwide fell by 30%, or 11% annualized, according to Fiserv Lending Solutions. The median home now sells for $174,000-about what it sold for in 2003. Among the cities that Fiserv tracks, Detroit-victim of subprime lending and sky-high unemployment-suffered the most, with an annualized decline of 22% in its median home price over three years and a 33% plunge in the year that ended June 30. Detroit was followed closely by Las Vegas, Phoenix, Merced (Cal.), Miami, and Modesto (Cal.)-all at the epicenter of the boom-bust quake.

Over the past year, prices dropped 15% across the U.S. and rose in only two cities: Clarksville, Tenn. (up 1%), and Johnson City, Tenn. (2%), reflecting demand for homes by an influx of retirees to the Blue Ridge Mountains.

But between the first and second quarters of 2009, the nationwide median home price rose slightly, by 1.4%, according to Fiserv. That’s the first such increase since 2006 and, says Fiserv chief economist David Stiff, “the first good news we’ve had.” But Stiff is quick to warn that one grace note doesn’t make a tune.

Given that prices tend to stabilize about a year after sales begin to recover, Fiserv expects prices to bottom out in mid 2010. It forecasts that the median home price will have fallen by 7.5% in 2009 and will drop another 9.2% in 2010, to a level not seen since 2001.

Sales have been picking up steam since April, and in July, they increased year over year for the first time since November 2005. The increase was driven by first-time buyers seeking to capture the $8,000 tax credit and by bargain hunters and investors lured by discounts of 15% to 20% from market value on foreclosed homes and short sales (properties sold for less than what was owed on the mortgage). Federal intervention in the credit markets helped shore up mortgage lending at superlow rates.

In its most recent report, the National Association of Realtors said that sales of existing homes (including single-family houses, townhouses, condos and co-ops) rose 9.4% in September compared with the year before, with the strongest rebound in the Northeast (12%) and the weakest in the West (6%). Inventory fell by 15% from the year before, to just under eight months’ supply (the time it would take to sell the current inventory at the current pace of sales). That’s the lowest level in two and a half years, but above the four- to six-month supply that indicates a market balanced between buyers and sellers. The condo market still staggered under an 11-month supply.

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