Last Week

Housing Ponders a Hard Landing

Sunday, August 27, 2006

Rest easy. The surge in home prices of the past five years isn't going to turn into a crash. The rate of appreciation is just going to slow, or return to normal. While prices may decline in a few isolated markets, for the most part they will remain steady.

That, at least, is the soothing scenario disseminated in recent months by a host of experts, many of whom are employed by home builders or real estate agents or financial institutions with large mortgage portfolios.

For those people, last week was one big series of uh-ohs.

First there was the report that sales of existing homes in July dropped to a rate 11.2 percent below the level a year earlier, with the inventory of unsold homes rising to a record 3.85 million, enough so that it would take 7.3 months to sell them at the current pace. The declines were most striking on the coasts.

Then came similarly alarming data on new home sales. Even Robert Toll, chief executive of luxury-home builder Toll Brothers Inc., was using the phrase "hard landing" to describe his industry's fate, in stark contrast with his buoyant prognostications of last year. And here in the once-frothy Washington area came the news that a Tysons Corner developer is reevaluating plans for the $1.1 billion Canyon Ranch Living project in North Bethesda, in apparent recognition that buyers might balk at forking over $900,000 to $5 million for condos on a site near Interstate 270 and Old Georgetown Road.

One glimmer of positive news for housing was the continued year-over-year rise in the national median price -- the level at which half sold for more and half for less. In July, the median price of both new and existing homes was about $230,000, 0.3 percent higher than a year ago for new homes, 0.9 percent higher for existing homes. But those figures don't take into account the vast array of incentives that increasingly anxious sellers are offering to entice buyers, including luxury cars, vacations and special breaks on closing costs. Big home builders are especially prone to use such goodies, partly because they want to keep "official" prices as high as possible so that a panicky psychology doesn't take hold.

So where is the market headed? Nobody can be certain; much depends on whether the number of unsold homes continues to rise. Last week, doom-and-gloomers, emboldened by the new data, were citing reasons to believe that the latest bulge in inventories is just a taste of things to come. Plenty of new homes remain under construction. Speculators who haven't yet unloaded their properties will do so for fear that things will get even worse. And then there are the hordes of recent buyers who, having assumed adjustable-rate mortgages that are becoming increasingly unaffordable as interest rates rise, may be forced to sell.

© 2006 The Washington Post Company