Home Prices and Home Sales Slow Down

As the nation’s largest maker of luxury homes, Toll Brothers, delivered some somber news yesterday: soaring home prices appeared to have ended and this is latest sign that many real estate markets are slowing.

While the company said it expected to report a record profit for the last 12 months, it predicted that it would sell fewer homes over the next year than it had forecasted and would make less money than previously anticipated. Among the reasons for this prediction are high gas prices and the recent hurricanes. Understandably, they’ve rattled consumers, causing some to delay purchases of houses, executives said. Moreover, some local governments appear to be holding back on construction permits, slowing new building.

“The price increases pre-Katrina were at warp speed, and since Katrina, instead of going up $5,000 or $10,000 every week or two, we have been limited to no price increases or very limited price increases,” said Robert I. Toll, the company’s chief executive, in a conference call yesterday. The number of investors buying condominiums and houses in the hope of turning a quick profit also seems to have plunged.

Which home loan markets appear strong?

Mr. Toll said that certain markets appear to be losing steam faster than others. Among them were:

• Washington
• Chicago
• Northern California

Fortunately, other areas are still strong, consistent markets for the company. They include:

• Boston
• Denver
• The west coast of Florida

The company, whose homes sell at an average price of $679,000 and whose typical buyer has an annual family income of more than $100,000, emphasized that it still expected a happy ending for the long housing boom.

Home prices, the company said, are expected to continue rising, but at historical averages and not at the rapid rates that they have recently in the Northeast and California. Since 1964, new-home prices have risen an average of 6% a year, according to the Commerce Department. Last year, they rose 13%.

How long is it taking homes to sell?

In many of the nation’s hottest real estate markets - such as those in search of a Florida home loan on the west coast of the state - houses are taking much longer to sell than they once did - some agents are talking about a slowdown in attendance at open houses. In September, there was a 4.7-month supply of already- built homes on the market, up from 4.2 months a year ago, according to the National Association of Realtors.

The news isn’t bad across the country.

“In a lot of our markets, we’re seeing inventory levels up 20, 30, 40 percent from a few months ago, ” said J. Patrick Lashinsky, a senior vice president at ZipRealty, a brokerage firm with offices in 15 metropolitan area. Some of the biggest increases were in the Phoenix, San Diego and San Francisco areas, he stated, while the number of houses for sale had also risen in Atlanta, Boston and Chicago.

For the moment, at least, prices have stopped their steep climb, with some owners reducing asking prices to attract buyers. Average sale prices traditionally drop in autumn, because home purchases slow then, but the decline appears to have been steeper than usual this year.

What does the future hold for Florida home loans and other markets?

Richard A. Smith, chairman and chief executive of Cendant’s real estate business, said he also expected a slowing in the housing market next year, but that 2006 would still be one of the strongest years on record for home sales.

“The problem with forecasting this time of the year is, if you look at the seasonality of the business, this is always the slowest time of the year,” Mr. Smith said.

The slowdown appears to be linked to a steady rise in mortgage rates in recent months. The average rate on 30-year fixed mortgages was 6.31% last week, an increase from 6.15% the week before and 5.77 at the start of the year, based on numbers from Freddie Mac. Even with the increases, the rates are still below historical averages.

Loan applications for purchases and refinancing fell 4.8% in the last week of October and were 15.2% lower than the same week last year, the Mortgage Bankers Association reported. Loans for purchases, meanwhile, fell 6.2% for the week and 11.9% from a year ago.

Some economists argue that the recent softening might be the beginning of a more severe downturn. They state that neither income nor population has grown quickly enough to justify the doubling of prices in some areas since 2000.

“There is a large psychological element behind current housing prices,” said Dean Baker, co-director of the Center for Economic Policy Research in Washington. “People are willing to pay them because there is an expectation that prices will continue to rise. Once people don’t have that expectation, things will change.”

Other analysts say the recent increases cannot continue.

“Home prices have been growing so fast for so long, outstripping income growth for many years,” said Gene Huang, the chief economist of FedEx, who keeps an eye on home prices as an overall gauge of the economy’s health. “Some kind of adjustment has to happen.”

More than four out of five economic forecasters surveyed by Blue Chip Economic Indicators said they expected existing-home price growth to slow to 5% by the end of 2006, from 13% over the last 12 months.

“All of a sudden, the ads in the paper show special mortgage deals, special incentives,” Mr. Toll said last week, referring to new housing developments nationally. “That’s an absolute indicator that the market has softened.”

In a constantly fluctuating industry, it’s difficult to know when Florida home loan rates will rise and all. As one of the more steady states in the nation, however, most potential owners in this area don’t need to worry about the changes negatively affecting the rest of the nation.