Home Market Takes a Tumble
Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008
Home values posted the largest decline in the first quarter since late 2008,
prompting many economists to push back their estimates of when the housing
market will hit a bottom.
Home values fell 3% in the first quarter from the previous quarter and 1.1%
in March from the previous month, pushed down by an abundance of foreclosed
homes on the market, according to data to be released Monday by real-estate
website Zillow.com. Prices have now fallen for 57 consecutive months,
according to Zillow.
Last year, the housing market showed signs of improving as price
depreciation slowed in some markets and stabilized in others. In response, a
number of economists began forecasting that housing would hit a bottom in
late 2011, then begin to recover. But the improvements, spurred by federal
programs that gave buyers up to $8,000 in tax credits, proved fleeting.
Sales collapsed when the credits expired last summer, and prices in many
markets have been falling ever since.
While most economists expected sales to decline after tax credits expired,
the drag on the market has been greater than many anticipated. "We expected
December and January to be bad" as the market reeled from the after-effects
of the tax credit, said Stan Humphries, Zillow's chief economist. But
monthly declines for February and March were "really staggering," he said.
They indicate "a reflection of the true underlying demand, which is now
apparent because most of the tax credit is out of the system, and it's being
completely overwhelmed by supply."
Mr. Humphries now believes prices won't hit bottom before next year and
expects they will fall by another 7% to 9%. Other economists revised their
forecasts. In April, the chief economist at mortgage company Fannie Mae,
Doug Duncan, said home prices in the second quarter would be 5.3% lower than
the previous-year period, down from his earlier estimate of a 2.6% decline.
The estimates, which are based on data from the mid-1990s on, come from a
proprietary computer program that takes into account sale prices for nearby
homes that appear comparable, the size and other physical attributes of the
home, its sales history and tax-assessment data, Mr. Humphries says.
Prices are decelerating in large part because the many foreclosed properties
that often sell at a discount force other sellers to lower their prices.
Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000
foreclosed homes during the first quarter, a new high that represented a 23%
increase from the previous quarter. More could be on the way: They held
another 218,000 properties at the end of March, a 33% increase from a year
The companies are bracing for more bad news: On Friday, Fannie reported a $6
.5 billion net loss, largely as it boosted loan-loss reserves in
anticipation of falling home prices.
Paul Dales, a senior U.S. economist with Capital Economics, says prices
could fall by as much as 10%, down from his previous forecasts of around 5%.
A March survey of more than 100 economists by MacroMarkets LLC forecasts a
1.4% drop in prices this year, down from the December estimate of a 0.2%
Other home-price indexes also show weakness. The widely followed Case-
Shiller index published by Standard & Poor's showed that prices climbed from
April 2009 until last summer, when they started declining as tax credits
expired. Today, prices are on the verge of reaching new lows, the index
shows. The Case-Shiller index tracks repeat sales of previously owned homes
using a three-month moving average.
According to the Zillow index, a handful of California markets and
Washington, D.C., saw price appreciation last year, but that has since
reversed. Mr. Humphries attributes the "double dip" in those markets, which
include Los Angeles, San Francisco and San Diego, to the way in which the
tax credit stimulated demand from buyers. When the tax credit went away,
markets were left with rising supply from foreclosures but with less demand
Detroit, Chicago and Minneapolis posted the largest declines during the
first quarter of the top 25 metro areas tracked by Zillow, while Pittsburgh,
Dallas and Washington posted the smallest declines.
To be sure, steep declines in home prices along with mortgage rates near
their lowest levels in decades have helped make housing more affordable than
at any time in the past 30 years, according to Zillow. Markets that have
lower levels of foreclosures, such as Dallas, and those with better job-
growth prospects, such as Washington, are faring better.
However, credit standards remain tight, posing another challenge for the
housing market. Just as many unqualified borrowers received loans during the
boom, "there are people today who probably could afford loans but can't get
them," says David Berson, chief economist at PMI Group Inc. The average
credit score on loans backed by Fannie Mae stood at 762 in the first quarter
, up from an average of 718 for the 2001-2004 period.
Joe Sullivan, a real-estate agent in Stockton, Calif., is worried that more
traditional buyers are seeing their loan applications canceled late in the
process as lenders change qualification terms. If mortgage standards
continue tightening, prices are "going to drop down to where only investors
can get them, people with cash money," he said. Sales to absentee buyers,
primarily investors, accounted for 47% of all Phoenix-area home sales in
March, the highest level for any month in more than a decade, according to
DataQuick, a real-estate research firm.
Christine Rice spent two years looking to buy a home in Los Angeles but
found herself continually losing out to bids from investors offering to pay
in cash. In September, she finally made a winning bid, paying $275,000 for a
two-bedroom home. The prospect of falling prices "doesn't keep me up at
night, but only because it was so cheap," says the 43-year-old tailor, who
says she and her husband needed to move to have more space for their family.
Her mortgage payments plus taxes are less than the rent she had been paying
. "If it had been a stretch, then maybe I'd be worried," she says.
Buyers who qualify for mortgages are demanding bigger discounts as added
insurance against further declines in values. Sellers, meanwhile, are
balking. "More often, they don't want to take the first offer," says Jeffrey
Otteau, president of Otteau Valuation Group, an East Brunswick, N.J.,
appraisal firm. "What they don't realize is, in an oversupplied market, the
next offer is for less."
While some analysts have argued that home prices need to fall to "clearing
prices" that will attract more buyers, price declines could also complicate
any recovery by pushing more borrowers under water. Zillow estimates that
more than 28% of borrowers owe more than their homes are worth nationally.
Those numbers are much higher in hard-hit markets such as Phoenix, where
more than two-thirds of borrowers owe more than their homes are worth.