After 5 Years of Growth, Home Prices Drop
Wednesday, July 26, 2006
In what may be the most telling sign yet that the real estate market here has shifted downward, median prices of homes in several parts of the Washington area have declined when compared with the same time last year.
In Loudoun County, for example, the median price of homes sold dropped 1.2 percent last month, compared with June 2005, according to Metropolitan Regional Information Systems Inc., the area's multiple listing service. In Fairfax County, prices fell by half a percent in May and a tenth of a percent in June. And in the District, the decrease was 0.8 percent in March and 1.2 percent in May, compared with the same months last year, even though prices in the District in June were higher than the year before. The median is the point at which half of the houses cost less and the rest more.
The declines are small, and certainly not universal. Prices continue to rise in some areas, most notably Prince George's County, where houses are still relatively inexpensive. But the drops are significant because they mark the first time in half a decade that home prices have fallen in a 12-month span, illustrating just how much the real estate landscape has changed after five years of double-digit growth in home prices.
The areas with declines have some things in common: swelling numbers of houses for sale, slowing sales and lots of new houses on the market. In Loudoun, where developers have put up acres of new subdivisions in recent years, nearly 5,000 properties are for sale via the multiple listing service, which includes mostly resale homes. That compares with 1,800 a year ago. Homes there now take an average of 75 days to sell, compared with 21 days a year ago. In the District and Fairfax County, the number of unsold homes and time on the market has also increased, boosted by a large supply of condominiums.
What's happening is part of a national trend in which regional markets that led the country during the boom are seeing prices flatten or decline as the number of unsold homes on the market mushrooms. Yesterday, the National Association of Realtors reported that the inventory was up last month, to a 6.8-month supply, based on a seasonally adjusted annual sales rate of 6.62 million units. In June of 2005, the inventory was 4.4 months, the sales pace 7.27 million. The median price of existing U.S. homes was up 0.9 percent in June, compared with the same time last year.
The question for many local buyers and sellers is whether the small declines foreshadow big price reductions in the months ahead.
Economists are split. One view is that any declines will be insignificant or temporary because of job growth and the strength of the local economy.
"Could it be a 5 percent drop in prices? Could it be 10 percent? Whatever it is, it will be short-lived, because demand is right there on the sidelines," said David A. Lereah, chief economist of the National Association of Realtors.
But others see a steeper, prolonged downturn in prices because of overbuilding in some areas, speculative buying and a run-up in prices that has outpaced affordability. Prices, they added, have actually declined more than the multiple-listing service statistics indicate because sellers have been offering such incentives as help with closing costs.
Peter Morici, an economist at the University of Maryland, said prices could drop 10 percent by the end of the year, and perhaps by 20 percent "by the time it's all over."
The market will take months to shake out, because too many sellers have not accepted that their houses are not worth as much as they had thought, said Mark Zandi of Moody's Economy.com. "The market can't complete its correction until that happens."
Zandi sees Washington area home prices declining over the next six to 12 months by an average of 10 percent, with the condo market experiencing larger price drops. The good economy, he said, is "not enough to save the market from this housing correction."