Signs of a Buyer's Market

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, August 24, 2006

Sales of previously owned homes fell more than expected last month, to the slowest pace in more than two years, while the number of unsold homes reached record levels, according to an industry report released yesterday.

These are among the starkest signs yet of just how quickly the once-sizzling real estate market has cooled in the past year, and analysts said they expected new-home sales figures to be more of the same when they're released today.

Existing-home sales dropped 11.2 percent to a seasonally adjusted annual rate of 6.33 million units in July, compared with 7.13 million the same time last year, the National Association of Realtors said. The sales pace has been on a general decline since last fall, but the latest figure represents the lowest level since January 2004.

The report is based on resales of single-family houses, townhouses, condominiums and cooperatives that closed during the month.

The number of unsold homes on the market nationwide reached a record 3.86 million -- up by almost 100,000 properties from June and a whopping 1.1 million from July 2005. At the current sales rate, it would take the market 7.3 months to absorb these homes.

When looking at just single-family houses -- which make up the bulk of existing homes -- the number of unsold homes translates to a 7.2 month supply. That's the highest since May 1993. Throughout the recent housing boom, inventory levels rarely exceeded a five-month supply.

The report follows a spate of recent news in the housing industry pointing to a downturn in the market. Toll Brothers Inc. the luxury-home builder based in Horsham, Pa., on Tuesday said its fiscal third-quarter profit dropped 19 percent and cut its earnings estimate for the year. Last week, an industry index that measures home-builder confidence in the market fell to its lowest point since 1991.

David Lereah, chief economist for the Realtors association, said higher interest rates had weakened sales, with many potential home buyers waiting for prices to come down.

According to Freddie Mac, the average interest rate on a conventional, 30-year fixed-rate mortgage was 6.76 percent last month, compared with 5.7 percent in July 2005.

The percentage point increase in the interest rate is significant, and could diminish buyers' purchasing power by about 15 percent in some markets, said Todd Sinai, an associate professor of real estate at the University of Pennsylvania's Wharton School.

"That's got to impact what people are willing to pay," he said. "That's got to bring it down."

Indeed, there are some signs of that already, with the median price of homes in yesterday's report dipping slightly below last year's in parts of the country. For example, in the Northeast, the median price of homes sold in July was $276,000, down 2.1 percent from the same time in 2005. The median is the point at which half of the houses sold for more and the rest for less.

In the South, which includes the Washington area, the year-over-year median price rose 3.2 percent, to $192,000. The country as a whole experienced a 0.9 percent increase to a median price of $230,000 for homes sold in July.

In parts of the Washington region, the numbers are even starker. In Loudoun County, for example, about half as many homes sold in July compared with July 2005, according to figures released recently by Metropolitan Regional Information Systems Inc., the region's multiple listing service. More than 4,700 homes were on the market in the county, up from 2,000 last year. The median sale price was down 2.5 percent.

But some areas with relatively less expensive homes -- most noticeably Prince George's County -- are still experiencing price gains. There, the median price of homes sold in July was $325,000 up 6.6 percent from a year ago, although sales are down and properties are taking longer to sell.

The sales rate released by the national group yesterday was lower than what many analysts had expected. Peter Morici, an economist at the University of Maryland, said he and others had made predictions based in part on the number of contracts signed, a leading indicator for home sales. Apparently, though, not all of the contracts came to fruition. "Some people managed to back out of the contracts -- that's what it means," Morici said.

Based on recent news from home builders, the scheduled report today on new-home sales is also likely to be "a bad number," he said. "People are very hesitant right now."

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