Surviving (or Thriving) in the Housing Slump

May 25, 2007 — -- For most people, a home is the biggest investment they will ever make, so a month like April, when the real estate market shows a bigger than 10 percent decline in sales activity, is bound to put some in a dour mood.

The flaccid market has a lot of homeowners wondering what to do if they want to sell and buyers hoping they can time the bottom of the market for maximum returns on their real estate plays.

By the Numbers

Thursday, there was a feeling of jubilation on Wall Street, thanks to a better-than-expected report on sales of new homes.

The Commerce Department said sales of newly built houses were up 16.2 percent during April over the previous month. It was news most housing analysts hadn't been expecting and buoyed the stock markets, as many people took the report as a sign that the housing bust might be coming to an end.

Builders cut prices on new homes for sale -- shaving about $30,000 off the median home -- in the hopes of cutting back on what had become an historically big inventory of unsold homes.

But the jump was so big it had skeptics thinking there had to be something wrong with the number.

"We've seen this before," said economist Joel Naroff. "A number has a huge gain like this, and it's wiped out very soon afterward."

The margin of error on the new homes report is plus or minus 13 percent.

The true picture of the market would not be clear until Friday, when the National Association of Realtors issued its monthly look at existing home sales. Sales of pre-owned homes make up some 84 percent of all sales in the country each month.

That report showed a 2.6 percent drop in sales, confounding analyst expectations of a much smaller retraction in sales. The slowdown was seen in every region of the country.

When combined, the two reports show that sales of all homes dropped by about 20,000 units during April.

What's Causing the Slowdown?

The recent trend to slower sales and lower prices is forcing many housing analysts to rethink the near-term prospects for real estate.

Most had expected to see a return to moderate growth by the middle of this year, but recent sales reports and warnings from some of the country's largest home builders have pointed to continued weakness in the market.

Normally, a period of low unemployment and strong growth in wages would help to bolster the housing industry. But that has not happened.

"The main factor here is that a number of the major subprime lenders went out of business," said Lawrence Yun, senior economist at the National Association of Realtors. "Some home purchasers who had loans committed from them are now out in the cold, and they now have to scramble and try to find a different lender."

He says the slowdown is going to be short-lived -- just a few months as these buyers with less than perfect credit try to find a new way to finance their American dream. Not everyone agrees.

"The reality is that a significant portion of that subprime mortgage is gone," said Naroff. "That demand is gone for good, and there's no way around it. The other thing that's gone is all of the speculators."

At the most basic level, demand has gone down, as buyers are not jumping into the market as quickly as they once did at the height of the home-buying frenzy.

What Should a Buyer Do?

Experts say today's housing market offers lots of choice for people looking to buy a home. Inventories of both pre-owned and new homes are at levels not seen in decades.

"It's a great opportunity," said NAR's Yun. "With such an abundant inventory out there, one does not have to make a hurried decision. During the housing market boom, I think some people had to make a decision a little too quick, and they had a little buyers remorse. In the current market conditions, I think the buyers will be happy."

But with so much choice, many buyers are saying they want more than just their ideal house; they want the ideal house at a bargain basement price.

"I expect buyers to continue doing exactly what they've been doing: waiting," said Naroff. "They're waiting for the prices to come down. This is their market and their market is to wait."

The key for buyers is to understand what is reasonable to expect in the local market where they are looking. Many towns in the Midwest and South did not see a huge influx of speculators during the housing boom, so they will not see prices come down.

Local markets like Las Vegas, San Diego and Miami, where "flippers" were gobbling up every house or condo with a "For Sale" sign in the yard with hopes that they would turn a huge profit in just a few months, are most at risk for big bargains in the coming months.

Naroff believes that the most oversold local markets' prices will likely see another 7 to 10 percent reduction in home prices during the coming months.

What Should a Seller Do?

If you're on the other side of the table at closing, the next few months will likely be an exercise in compromise.

Housing experts say home builders are throwing big incentives at buyers of new homes in the hopes that they will sign a contract, adding upgraded kitchens or top-end landscaping to a home for free.

This month's new home sales report shows that the builders are finally cutting the asking prices for the first time, too. That is something that's going to happen for people hoping to sell their pre-owned home as well.

"There has to be more upstaging of homes, better marketing, and sometimes it requires conceding on the prices," said Yun.

He said sellers should be aware of local market conditions when setting a home's asking price and planning on how long they will have to wait for a legitimate offer to come in.

Naroff has a bit more sobering assessment for people hoping to sell their properties: "This market will not clear until there's significantly greater price declines in a wide variety of areas around the country. I would guess in the markets that are soft, you probably need another 10 to 20 percent off the price to get those markets cleared."