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Spring Housing Outlook

Friday, 13 Apr 2007 | 5:12 PM ET

Spring house-hunters can expect to find a wide selection and falling prices in many American cities, though, like politics, all real estate is local.

Aspiring homeowners in brownstone Brooklyn, N.Y. won’t fare as well as those scouring for deals in parts of southern Florida, but, on the whole, market conditions clearly favor buyers. That’s due in part to rising foreclosures, which is helping to boost inventory levels while keeping prices stable or lower.

“The good news is that we’re entering spring home buying where sellers are bringing prices down, inventories are pretty good, mortgage rates are near cyclical lows and the economy is generating jobs, so we’re in relatively good shape,” said David Lereah, chief economist at the National Association of Realtors. “The monkey wrench is the subprime problem.”

Given the spike in defaults and foreclosures among subprime borrowers -- individuals with spotty or limited credit histories -- and the resulting fallout from loose lending practices, mortgage lenders are setting the bar higher for loan applicants. Those with solid credit histories aren’t likely to encounter any problems securing a mortgage, housing experts say, but those with poor credit reports undoubtedly will.

“It will hit the low end of the housing market and that will probably have a negative impact on the mid-level market because in order for someone to trade up, you need to sell the house you are in,” said Celia Chen, director of housing economics at Moody’s Economy.com. “If the lower-income buyers can’t buy your house, you can’t move.”

A slide in would-be subprime buyers will likely dampen demand. That, coupled with the bump in foreclosures, could push prices down further in some regions. February foreclosures rose 12% from the same period last year, according to foreclosure-tracker RealtyTrac, with Nevada, Colorado and Florida logging the top foreclosure rates. Total foreclosures are on track to rise 33% this year over last.

“There are still more price declines to come,” Chen added. “I think a lot of buyers feel that way too, so that’s probably another reason the market will remain soft (for sellers) this spring. People might wait and see how much further prices fall.”

Sellers in areas with an overabundance of homes on the market may need to cut prices to move their homes; in some markets, they're enticing buyers with incentives such as paying for closing costs.

Pricing trends vary tremendously region to region – and further softening will most likely be limited to certain markets, such as those where foreclosures could potentially cause new property gluts, or, in regions that overheated during the real estate boom, when investment speculators were scooping up properties using creative financing and flipping them for eye-popping profits.

Your Neighborhood Matters

In fact, any further drops can differ by neighborhood within the same city or region, brokers say.

For instance, in parts of San Diego, namely coastal areas and more established neighborhoods with limited inventory , prices have started to rise again, said Scott Voak, a broker with Century 21 in Rancho Bernardo, Calif. But other pockets of San Diego County, namely in newer developments, may see a jump in foreclosures in coming months, he adds. In these areas, many buyers used exotic mortgages to get into properties with small down payments -- and made minimum payments that did not cover their monthly interest, causing their principal to rise beyond the value of their home. As the interest rates adjust on their loans, owners may find they cannot meet the new payment and have no equity left to refinance with. If such a scenario plays out, foreclosures will rise and prices will fall.

Strong Spots


“The more stable neighborhoods like La Jolla will fly right over this while newer communities, where buyers all purchased McMansions in the last few years, will be more susceptible,” he said. That’s why he’s telling his real estate investor clients to wait until November to buy, but those in need of a home would be just as well-served buying now given the sunny long-term outlook.

Floyd Scott, president of Century 21 Arizona Foothills, anticipates price declines of 3% to 5% in the greater-Phoenix area this year versus last, as buying activity is also down. “It’s a buyer's market,” Scott said. “We’ve been in a slowdown for about 16 to 19 months right now, and I think we are pretty close to a bottom.”

He said the Phoenix market peaked in September 2005, when investors were flipping houses for $300,000 after buying them for an average of $200,000. “Since then, prices have probably come back half of that” to about $250,000.

Good values can be found in Florida, where prices have declined, though pricing in some markets may erode further. In certain locations, prices are 20% off of their highs, says NAR’s Lereah.

Chicago Likely Hit Bottom; Sellers Still Rule N.Y., Texas

Parts of the Chicago market appear to have hit bottom, according to Clarissa Buhelos, a broker in Glencoe, Ill., where the average sales price is about $1.5 million and buying activity has increased greatly over the past few weeks.

“Over the past 12 to 24 months, you’ve bottomed out in terms of price,” Buhelos said. “There are some markets still trying to catch up, but overall it’s improving. We’re taking baby steps towards an upward (bound) market.”

Buyers may have bargaining power in many regions, but there are many areas where prices continue to defy gravity, such as Manhattan, the brownstone-lined streets of Brooklyn, as well as many of the NY-metro area’s bedroom communities.

“Our market has been very strong,” says Susanna Palmaffy, a broker with Burgdoff ERA in Maplewood, N.J., a community with 1920’s colonial homes about 30 minutes by train from midtown Manhattan. “As things come on the market, some are going into contract with multiple offers.”

The average home price in her area is about $600,000 and she said home prices appear to be flat with last year’s levels, “but they could get higher, we just don’t know.”

Sellers also continue to have the upper-hand in Texas, says James Gaines, housing research economist for the Real Estate Center at Texas A&M University. In the state's four metro areas, “housing markets are still strong, demand is still strong, inventory levels are not a problem and prices are still continuing to grow,” he added.

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