Home Prices Not Expected to Rise

The most recent report on home prices isn’t a lot more encouraging than previous reports on home prices. Released Tuesday by the National Association of Realtors (NAR), the latest numbers showed continued strength - but there are increasing signs that prices have plateaued.

Of 147 markets surveyed, 69 had gains from a year ago of more than 10% — only six metro areas experienced declines. However, from the second quarter to the third quarter, the national median home price rose to $215,900, up just 3.5%. Contrast this figure with a 10.4% jump in the prior quarter and you can see where the concerns arise.

In Florida, Elena Filipa, vice president of the Corcoron Group in West Palm, said: “We’ve leveled off. I would say prices will go up this year, but not as fast as they have.”

This doesn’t come as a surprise to many economists who have been waiting for a downturn. Richard DeKaser, for example, is thechief economist for mortgage banker National City. He has been reluctant to call the top, but thinks it has finally passed.

“We’re coming down the other side of the mountain,” said DeKaser.

The signs include:

• Builder pessimism - The builders DeKaser surveys are less optimistic than they were, even just a few months ago. One leading builder, Pennsylvania-based Toll Brothers, announced last week that expected demand for 2006 would be down, resulting in moderating price increases and fewer sales.

• New-home sales declining - DeKaser also notes that the number of new homes sold have fallen sharply since peaking in July at an annual rate of 1.3 million units.

• Inventories rising - Supplies of new homes are way up, to nearly 500,000 units, from 350,000 a few months ago. “That’s an all-time high for new homes,” says DeKaser. The higher the inventory, the more likely prices will fall.

• Sell times are up - Houses are sitting on the market for a longer period of time. New homes now take about 4.1 months to sell and existing homes 4.7; both figures are up substantially.

What can you expect from Florida home prices and in other areas?

In a recent survey, NAR members say they predict home prices to rise only 5% in the next 12 months. Nearly half of the realtors predict prices will rise less than this figure and 6.4% actually expect prices to fall.

“You can’t expect double-digit price increases to go on forever,” said Walter Molony, spokesman for NAR. “We’re seeing a market in transition in which there’ll be an easing of price increases in the future.”

Overall, DeKaser thinks home prices will decline 1.7% during the fourth quarter of 2005 and stay almost flat all the way through 2007. But history shows that some over-valued markets could fare much worse. It’s been speculated that the Florida home loan industry could be included in this over-valued category.

Molony points out that the most severe drops in real-estate prices are usually triggered by an underlying economic crisis. After oil prices went into a six-year decline in the late 1970s, housing prices in oil cities experienced steep drops.

How to protect yourself

It may already be too late to cash out at the top, which some residents of hot markets have already done. About 500,000 California residents moved out of state since 2001, according to economy.com, many to take advantage of lower housing prices elsewhere. Of course. houses are not really investments in the same way stocks or bonds are.

As an investment, timing the market is touchy — miscalculate and it can cost you 30% more to get back into the market. Add in commissions and closing costs and it just doesn’t make sense except for retirees or others in a position to relocate or downsize.

People looking to buy right now should shop carefully. Look at a number of homes, try not to fall in love, and be realistic about prices. Don’t be afraid to bid low. The days of multiple bids may be over for a while.

With interest rates rising, try to get into a fixed-rate mortgage. Adjustable rate loans could adjust to a much higher level when they come due, making monthly bills much costlier. ARMs rates are so close to fixed at this point, it costs little extra to forego the risk of higher rates in the future.