The U.S. housing market will continue softening because prices are too high while too many homes remain unsold, industry observers said after a trade group reported a steep drop in existing-home sales.
Sub-prime mortgage woes and harsh winter weather were the main culprits for an 8.4% decline in sales of existing homes in March from the month before, the National Assn. of Realtors said Tuesday. It was the sharpest month-to-month fall since a 12.6% plunge in January 1989.
In California, existing-home sales fell 8.1% from the month before, the California Assn. of Realtors said. Prices held up better, with the national median price declining 0.3% from a year earlier to $217,000, and rising 3.2% from a year earlier in California to $580,090.
The worse-than-expected national sales report made some analysts a bit more bearish on housing. Prices still need to drop to make homes more affordable for buyers, they said.
Also, in response to the sub-prime mess, lenders have tightened standards, making it harder for some borrowers to get mortgage money. Inventories of unsold homes nationally rose to a 7.3-month supply at the current sales pace, the highest since October, putting further downward pressure on prices.
The bottom line: The bottom isn’t here yet, some experts say.
“The urgency that characterized the boom has definitely dissipated,” said economist Leslie Appleton-Young of the California Assn. of Realtors. “For the first time in the last 10 years, we forecast a softening in the median home price.”
Home sales in California will fall 7% in 2007 compared with last year, she predicted Tuesday, and the median price will drop 2%. The median is the point where half the homes sold for more and half for less.
Some California housing markets are stronger than others, Appleton-Young said. The Bay Area is the most robust and Southern California is mostly holding its ground. But weakness is emerging in the Inland Empire and the Central Valley, where home builders have been adding more supply than in coastal areas, she said.
As reported earlier this month by DataQuick Information Systems, the median price paid for a home in Southern California last month was $505,000, up 4.6% from March 2006. Sales volume, however, dropped 32.4% from a year earlier, reflecting a trend that began 18 months ago when the red-hot market first began to cool.
Economist Christopher Thornberg of Beacon Economics said prices traditionally lag behind fundamental changes in the market. He said he was suspicious of reports that they were still going up in some areas.
“The numbers keep getting worse and worse,” he said. “Housing has no more ‘up’ in it. Prices have to start coming down or the market will stall.”
Years of rising prices have shrunk the pool of potential buyers so much that momentum is now impossible to sustain, Thornberg said. A 10% down payment to get into today’s median-priced Southern California home requires a buyer to spend $40,000 a year in housing costs from then on, he estimated.
“How many families can afford that? The answer is: not many,” Thornberg said.
Prices stayed artificially high during the recent boom, he said, because sub-prime lenders had given loans to marginally qualified buyers who could not otherwise afford houses. The sustained increases in home values strongly motivated investors to catch the wave.
“Consumers are in over their heads now” and are burdened with debt, Thornberg said.
There is also a chance of a recession by the end of the year that might reduce the number of jobs and pull down housing prices by adding more foreclosed homes to the market, he added.
However, those who are less sensitive to prices are still spending freely, said Michael Collins, general manager of Shorewood Realtors in Manhattan Beach. Gross sales at his brokerage were up to $432 million in the first quarter from $425 million a year earlier, Collins said.
“Generally speaking, it’s great here in our area and [it] continues to get better,” he said. “A lot of our buyers are immune from the economy.”
The average South Bay home sale handled by his brokerage is $1.25 million, Collins said. Buyers are typically in such businesses as investment banking, entertainment and law.
In Orange County, meanwhile, the inventory of housing for sale is growing, with the number of homes in escrow at half the level of the year-earlier period, said Steven Thomas, president of Re/Max Real Estate Services.
“The overall market has really changed,” he said. “We were trucking along nicely in February and then sub-prime [mortgage woes] hit in March.”
Inventory will rise through the spring and summer, Thomas predicted, before “frustrated unsuccessful sellers throw in the towel” and cut their prices.