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With few exceptions, Western real estate expected to stagnate

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Donald Anthony slashed the asking price on his four-bedroom, two-bathroom house by almost $80,000 -- and added $40,000 worth of improvements, including a new kitchen and leafy landscaping.

He's used three different agents. He listed the 1,800-square-foot home -- an immaculate ranch on a quiet cul-de-sac -- on for-sale-by-owner sites, in newspapers, on cable television and the community site Craigslist. He or his agents have spent at least 50 idle afternoons hosting open houses.

But the 74-year-old retired physicist cannot unload the house, now listed at $489,950 -- well below the price of comparable homes in the fast-growing region between San Francisco and Sacramento.

"Buyers have vanished," Anthony shrugged in front of new Shaker maple cabinets and never-used appliances. "If this doesn't sell post haste, I'm going to bite the bullet and pull it off the market."

Although few experts predict home values will fall dramatically in 2007, many economists say prices throughout the West -- particularly California and the Southwest -- won't improve for 12 to 18 months. The Pacific Northwest, where home prices are enjoying double-digit appreciation, is a rare exception.

Building booms in many markets over the past half-decade, combined with mortgage interest rates that have increased about 1 percent in the past year, have resulted in residential real estate stagnation in most markets. The gridlock defies conventional wisdom, stubbornly remaining neither a buyer's nor a seller's market.

"The residential real estate market in 2006 was characterized by a gap between buyer and seller expectations," said California Association of Realtors President Vince Malta. "Sellers sensed that the peak of the market was approaching, yet still hoped to obtain the highest possible prices. Buyers' sense of urgency waned as the number of homes on the market grew."

The Los Angeles-based association estimated that the median home price in California would decline 2 percent next year, to $550,000, compared with a projected median of about $561,000 this year. The number of houses and condos sold next year is expected to drop 7 percent to 447,500.

That's slightly ahead of the nationwide forecast by Moody's Economy.com. The private research firm projected that the national median sales price for an existing home would decline in 2007 by 3.6 percent -- the first yearly decline in U.S. home prices since the Great Depression of the 1930s.

Reasons for the slump vary.

In historically hot markets, economists say, median home prices simply hit an affordability wall.

San Francisco and other expensive coastal cities, including Monterey and Santa Barbara -- where investors cashed in on scorching appreciation in the late 1990s and the first half of this decade -- have become unaffordable for the middle class.

The number of Californians who could comfortably pay the mortgage on an entry-level home fell to 24 percent in the third quarter -- down from 28 percent last year and 44 percent in 2003, according to CAR. The median price statewide last quarter was $563,190.

"I don't see how the economy can continue with these prices," said Stephen Levy, senior economist of the Center for Continuing Study of the California Economy.

In Sun Belt havens such as San Diego, Las Vegas and Phoenix, overzealous construction resulted in a glut of new homes and condos. Real estate experts say sellers there will struggle in 2007 -- particularly short-term investors who purchased property with the intent of "flipping" it quickly.

"We have to work off the inventory," said Daniel Nussbaum, a licensed investment adviser and CEO of Calabasas-based TheUSARealty.com. "I honestly think we're past the worst of it, but if you don't take out your magnifying glass you might not notice."

One of the few exceptions to the nationwide slowdown is the Pacific Northwest.

In Washington, the number of houses sold in the third quarter of 2006 dropped 16 percent -- but the median price surged nearly 12 percent from the same period last year, to $300,900, according to the Washington Center for Real Estate Research. In Seattle's King County, the median price surged 14 percent to $432,600.

The dot-com bust of 2000 hammered the region, which shed a disproportionate number of manufacturing and technology jobs in the following half-decade. Homeowners there haven't enjoyed the same run-up as investors elsewhere, said Glenn Crellin, director of the WCRER at Washington State University.

"Our real estate market essentially came to the party a little late. As a result, we're going to be able to have a softer landing than many of the other communities nationwide," Crellin said.

Another advantage: Washington is one of the top 10 states for what the U.S. Census calls net domestic migration -- the number of people who move there from other states.

California recorded a net domestic loss of about 29,000 people last year -- the first negative flow since the mid-1990s, according to March statistics from the California Department of Finance.

About 97,000 Californians moved to Washington in 2005, making it the fourth most popular destination for Californians after Texas, Arizona and Nevada. Oregon was fifth, with more than 83,000 ex-Californians, the department reported.

California's departing homeowners typically use their substantial equity to fund their next real estate investment. Although some Seattle and Portland residents grumble about "Californication," the trend has helped keep home prices there rising, said Brian Kreick, broker for Lynnwood, Wash.-based Kreick Realty Group.

"I have clients from Southern California who can't believe what they can get up here for the money," Kreick said. "I showed one guy a house in Redmond that was $830,000 and still needed a new kitchen. He thought it was a great deal."

Meanwhile, back in Antioch, Zach and Katherine Chouteau are looking for a house or condo with a home office and a yard for two pug dogs.

They'd love to buy here in the Sacramento River Delta region, but the couple -- who moved from suburban New York five years ago -- are discouraged by higher interest rates and frustrated by the perception that many owners have halcyon-day notions of multiple offers and bidding wars.

"It's definitely a friendlier market than earlier this year, but not a dramatically cheaper one," Zach Chouteau, 41, said. "People have gotten really spoiled by the rapidly escalating prices, and it seems like they're in denial that things have leveled out. They're just fishing for the best price."

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