Lower home prices are luring some buyers back into the U.S. housing market, but foreclosures and a weakening economy are likely to keep downward pressure on prices for at least another year, economists say.
A quarterly Wall Street Journal survey of housing data in 28 major metro areas shows that the glut of unsold homes listed for sale is shrinking in most of them. In many cases, sales have been stimulated by investors who are grabbing what they see as bargains on homes that can be turned into rentals. Metro areas with the biggest drops in for-sale signs include Sacramento and Orange County in California and the Virginia suburbs of Washington, D.C.
The recent headlines give a mixed picture. On Monday, the Census Bureau reported that new home sales in September were at a seasonally adjusted annual rate of 464,000 units, down 33 percent from September 2007. The median sales price for new homes in September was $218,400, down 9 percent from a year earlier. Last week, the National Association of Realtors said sales of previously occupied homes in September edged up 1.4 percent from the depressed year-earlier level, the first such rise since November 2005, largely reflecting sales of foreclosed homes.
Housing analysts caution that many homes that aren't currently listed for sale may hit the market in the next year or two. This looming supply includes pending foreclosures and homes temporarily taken off the market while their owners await stronger demand. With banks chopping prices on foreclosed homes, other sellers "are giving up and taking their homes off of the market," says Michael Lyon, president of Trendgraphix Inc., a research firm in Sacramento.
Meanwhile, credit remains tight, consumer confidence is crumbling, and job losses are removing some potential buyers from the market while pushing others toward foreclosure. "Now we're adding a second leg down (in housing), which is the job losses," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
Mortgage rates jumped Monday amid continued turmoil in the credit markets. Some mortgage firms quoted rates of 6.5 percent or more for standard 30-year fixed-rate loans. That was up from an average of 6.2 percent last week, according to HSH Associates, a financial publisher.
Despite all the gloom, some people believe it isn't too early to pick up bargains. One key, they say, is a deep understanding of the local demand for rental housing.
Dinesh and Rima Kumar, who live in Ashburn, Va., last month bought a town house in Sterling, Va., a suburb of Washington, D.C., for $154,000. The same home sold in June 2005 for $375,000 to a buyer who used subprime loans to finance 100 percent of the price. It went into foreclosure late last year. Kumar says he has found a renter at $1,500 a month. The Kumars, who paid cash for the home, calculate their monthly expenses -- including taxes, insurance, maintenance and fees -- at $491 a month.
The couple made the plunge partly because Ms. Kumar, a real-estate agent for Realty Direct, noticed that homes in the area priced at $250,000 or less were attracting multiple offers. Home sales in the northern Virginia suburbs of Washington totaled 3,360 in September, up 92 percent from a year earlier, according to the Northern Virginia Association of Realtors. The average price: about $333,000, down 32 percent from a year earlier.
"This could be the bottom," Mr. Kumar says, and even if it isn't, "the down side on a $150,000 property is pretty low." Moreover, he has been burned in the past by stock-market investments and thinks rental income will far exceed the meager interest rates offered on bank deposits.
Real Property Investment Group LLC of Atlanta recently bought a three-bedroom house in Snellville, Ga., a suburb of Atlanta, for $50,000. The home had sold in March 2007 for $116,900 and went into foreclosure a year later. The latest sale price is only modestly above the $45,800 price the home fetched when it was newly built in 1981, according to RealQuest.com, a data service of First American CoreLogic Inc. Charlie Chico, managing partner of Real Property Investment, estimates that the home can be rented out for $900 a month.
Still, Chico notes that foreclosed homes aren't necessarily bargains. "You have to be picky," he says.
Though housing demand increases over the long run with population, it may be tepid in the next year or two. In hard times, notes Jay Brinkmann, chief economist at the Mortgage Bankers Association, many young people move in with parents or find roommates, reducing the rate at which new households are formed. Brinkmann also expects a further rise in foreclosures over the next year.
Barclays Capital estimates that banks and loan investors owned 826,200 foreclosed homes as of Sept. 1, up from 343,500 a year earlier. Barclays forecasts that this inventory will peak at around 1.3 million homes in mid-2010.
Ivy Zelman, chief executive of housing-research firm Zelman & Associates, says far more vacant homes are being held off the market than usual. In the second quarter, vacant homes that weren't listed for sale totaled about 6.5 million, she estimates, using Census Bureau data. That's about 1 million more than the typical level during the first half of this decade. If a million of those vacant homes were listed for sale, listings would rise about 23 percent from the current level. Some of these empty homes are in the foreclosure process, Zelman says.
Based on the S&P Case-Shiller national home-price index, prices on average already were down about 18 percent in this year's second quarter from the peak two years before. Celia Chen, director of housing economics at Moody's Economy.com, expects a further drop of about 14 percent before prices bottom out in the second half of 2009. Prices won't bottom out everywhere at the same time, of course. Chen expects Florida's recovery to lag behind that of the nation as a whole, partly because a backlog of foreclosures in courts there will take time to clear. In the Miami area, nearly 18 percent of home mortgages are overdue or in foreclosure, compared with a national average of 7 percent, according to Economy.com.
The glut of homes in South Florida is concentrated on the lower end of the market, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Inc., a big real-estate brokerage there. Homes priced at less than $300,000 account for about 62 percent of the single-family houses and condos listed for sale in Miami-Dade and Broward counties, up from 33 percent in April 2005.
But consumer confidence is lacking. As stock prices lurched downward in recent weeks, "the phone stopped ringing," says Tip Powers, president of Realty Direct, Ashburn, Va. Some people tempted to invest in real estate were suddenly too jumpy -- or had lost in the stock market the money they intended to put into property.