- The Washington Times - Tuesday, September 26, 2006

The median home price in the United States dropped last month for the first time in 11 years and is expected to keep falling each month until next year in what could be an unprecedented string of declines for the housing market, the National Association of Realtors said yesterday.

The 1.7 percent drop to $225,000 in August was the second largest yearly price decline on record. Economists said more declines will be needed to work off a record backlog of homes for sale — 7.5 months worth nationwide.

“We have a serious correction taking place in the housing sector,” Richard Fisher, president of the Federal Reserve Bank of Dallas said in a speech, singling out housing and autos as sore spots in what otherwise is a “healthy and robust” economy.

The Fed wants to see economic growth downshift, led by the interest-sensitive housing and auto sectors, to cool inflation. Economists hope that recent solid gains in jobs and income and a recent plunge in oil and gas prices will help consumers cope with the rapidly deflating value of their biggest asset and source of wealth.

A year ago, homeowners were enjoying double-digit price gains and were tapping voraciously into their home equity to finance an estimated $500 billion in yearly spending.

David Lereah, chief economist of the Realtors group, predicted prices would continue to decline until next year, but that the development is “healthy” because it will make homes more attractive to buyers and help to boost sales.

Sales fell for a fifth month in a row last month and are 12.6 percent below last year’s levels, but the relatively small 0.5 percent decline in August suggests the price cuts are working to move houses, he said.

“This is the price correction we’ve been expecting,” he said. “Sellers are starting to become more realistic, and that could provide some lift to home sales because there is a healthy underlying demand from household growth and job creation.”

Other analysts say any back-to-back decline in home prices of more than two months would be unprecedented in the U.S. and would indicate a deep slump in the housing market that could take years to play out. Top federal regulators testified earlier this month that housing could go through a period of stagnation lasting as long as a decade.

The Realtors’ home price figure reflects the median price of homes sold nationwide during the month, and can be influenced by a shift to sales of lower-priced homes as well as price cuts. Another gauge of home prices published each quarter by the federal government attempts to filter out sales shifts by measuring the appraised value of homes. That index has shown no price decline.

Economists say both measures are flawed — for example, by not factoring in financial give-backs and incentives offered by sellers. Many prefer the Realtors report because it is tied to day-to-day sales in the market where prices ultimately are set.

Joel Naroff of Naroff Economic Advisors said the Realtors report shows a housing market in crisis.

“For months, there has been a debate over whether the housing market bubble has burst or is only slowly deflating,” he said. “That debate is now basically irrelevant.

“With inventories so high, there is a lot more adjustment before the existing home market hits bottom. Prices are going to have to fall a lot further and/or sellers are going to have to pull their homes off the market. Until those things happen, the excess supply will pressure prices.”

David Wyss, chief economist at Standard & Poor’s Corp., said the top 10 metropolitan areas in the country could see price drops of 6 percent in the next year — including Washington.

“Although we have been predicting a stabilization of housing prices nationwide, we expect declines in the most overpriced areas and those where employment is poor.”

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