Home-Sales Forecast Not Rosy

By Sandra Fleishman
Washington Post Staff Writer
Saturday, April 29, 2006

Home prices in much of the Washington region will likely drop 10 percent or more because prices have far outpaced affordability for first-time buyers and investors, according to a forecast this week by Mark Zandi, chief economist of Moody's Economy.com.

Condominiums will be hardest hit, Zandi predicted Thursday at the National Association of Home Builders' spring construction forecast. He said during his presentation that there are no hard data to pin down how far prices might fall or how the prices of single-family houses would be affected, compared with condos. In an interview later, he said that the growing inventory of condo units that are for sale or being built here suggests that the slide would be worse for that sector.

"I could say roughly that prices would fall about zero to 5 percent for single-family homes and about 15 to 20 percent for condos," he said.

The Washington area's relative risk as a real estate market has been the subject of many conflicting reports by economists, banks and industry analysts. The reports have reached different conclusions based on different variables -- ranging from a prediction by Dean Baker of the Center for Economic and Policy Research that prices could drop 25 percent to a ranking of "moderate and stable" by Credit Suisse First Boston LLC. Building-industry officials, including David Seiders, chief economist for the builders association, have generally forecast a "simmering down" of the market from an "unsustainable" pace.

Seiders said at the meeting this week that his latest forecast calls for price increases to slip nationally to about 4 percent by 2007 from 12 percent in 2005. Seiders introduced Zandi as "the best regional analyst in the country," but followed Zandi's downbeat report with a touch of humor. "Before everyone runs out and sells their house, particularly in the Washington area, let me say that Mark has been coming here for several years and the story has been building. . . . Up until now, most of Mark's prophecies" have not come to pass, Seiders said.

In an interview, Seiders said: "I think that it is not a foregone conclusion that we're going to see prices decline." Seiders said he has been "heartened" by data collected by the Federal Deposit Insurance Corp. that show that price busts do not always follow price booms. Prices collapse "only when there is an independently caused economic impact" on the local market, such as plants closing or jobs moving.

Zandi predicts declines of 10 percent or more in the area made up of the District, Northern Virginia and suburban Maryland excluding the Bethesda area. Bethesda and its surrounding areas, which the Census Bureau has broken into a separate tracking area, could experience a 5 to 10 percent slide from the peak prices of last fall, he said.

Northern Virginia is susceptible to the risk of price declines because it has the highest concentration of condos and has seen the most building generally, Zandi said.

The speech was the first time Zandi has named specific areas in the nation where he expects "crashes," which he defined as declines of more than 10 percent, and "corrections," where he sees a drop of 5 to 10 percent.

He pinpointed six areas where prices have exploded as the most likely to see crashes. In addition to the Washington area, they were Atlantic City-Ocean City, N.J.; Las Vegas; Miami; Orlando; and Phoenix.

Zandi noted that he does not expect the nation's housing market to collapse because jobs are being created, "businesses are flush," lenders are in healthy financial shape, and builders have "done a pretty good job in matching demand to supply." He said, however, that "there will be a correction. . . . Nationally, prices will essentially go flat through 2006, 2007 and 2008."

Zandi said his predictions reflect how "the housing market is very interest-rate sensitive." He said that because of the jump in interest rates from less than 6 percent a year ago to about 6.6 percent this week, "two key sources of housing demand are now getting locked out" -- the first-time buyer and the investor.

More than 40 percent of home buyers last year were in the market for the first time.

Until recently, despite rising rates and home prices, lenders had still been able to entice borrowers with loans that required no money down, interest-only payments or other terms that kept monthly payments low, but regulators and lenders themselves have gotten increasingly nervous about exposure to defaults, he said.

"This game is up," Zandi said.

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