Housing Prices to Drop, Report Says

Housing prices, slumping after a five-year boom, are projected to decline in more than 100 of the nation’s metropolitan areas, with the Northeast, Florida and California among the areas hardest hit.

The forecast by Moody’s Economy.com, a private research firm owned by Moody’s Corp., presents one of the starkest views yet of the housing slowdown that has been gathering force in recent months.

The West Chester, Pa.-based forecasting firm projects that the median sales price for an existing home will decline in 2007 by 3.6%, which would be the first nationwide decline for an entire year in home prices since the Great Depression of the 1930s.

The report projected that 133 of the nation’s 379 metropolitan areas would suffer price declines. Those metropolitan areas with declining prices account for nearly one-half of the value of the nation’s stock of single-family homes.

In Southern California, the report predicted declines of 11.4% in Riverside and San Bernardino counties, 10% in Orange County, 8.5% in San Diego County and 4.8% in Los Angeles County.

The price declines represent quite a contrast from the last five years when low mortgage rates pushed sales to five consecutive annual records and prices in the hottest sales areas skyrocketed.

But this year, the once red-hot housing market has cooled significantly.

Some analysts are worried that the slowdown could become so severe that it could drag the entire country into a recession, much as the bursting of the stock market bubble in 2000 led to the 2001 slump.

The housing report said the biggest percentage price decline would be in Danville, Ill., where prices have already fallen by 18.7% from the peak in the second quarter of 2005 to a low point in the first three months of this year.

That setback occurred because of layoffs in autos and other manufacturing industries, which depressed the local economy.

The second-biggest decline is projected to occur in the Fort Myers, Fla., area, a fall of 18.6% from the peak in the final three months of last year to a low-point for prices that is projected to occur in the second quarter of 2007.

The 133 areas with slumping prices are concentrated in the states of California and Florida and the Northeast corridor from southern Maine to just south of Washington, D.C., as well as boom areas of Nevada and Arizona and some depressed sections of the Midwest such as Detroit.

Of the areas with falling prices, 73 were forecast to hit their low point by the end of this year with the rest seeing a trough for prices in 2007 or later.

But even in areas which have already hit a low point, the rebound in prices is not expected to occur quickly.

“Prices are going to go down and stay down for awhile. It will take at least a couple of years to work off the excesses of the last decade,” said Mark Zandi, chief economist at Economy.com and the principal author of the report.

Not all parts of the country will experience price declines. The report said Texas, the Southeastern states other than Florida and much of the Midwest Farm Belt should be immune from price declines although price increases were expected to be modest.

The report said the most vulnerable areas for price declines were those regions where red-hot markets attracted speculators known as “flippers” who purchase homes in hopes of selling them fast for a quick profit.

“Housing’s downturn has turned even more dramatic with the rapid flight of the flipper from the market,” the report said. “These investors have gone from sending home sales and prices shooting higher to driving sales and prices lower.”

The report described the current environment as a “correction” and not a “crash,” but it cautioned that there were downside risks that could make the slowdown more serious.