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Realtors: Home Prices May Dip This Year

First Time Since the Great Depression That Home Prices Have Gone Down

By Truman Lewis
ConsumerAffairs.com

April 12, 2007

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It's hard to find a more optimistic group than real estate agents, but the National Association of Realtors is tempering that optimism this year. It's predicting U.S. home prices will decline 0.7% this year from last year's level. Some economists are predicting an even steeper decline.

It would be the first time since the Great Depression that home sales have slipped from one year to the next.

The prediction follows the collapse of the subprime lending market, which has put a crimp in the sale of both new and existing homes.

It's harder to buy a home now that lenders have started tightening their standards and, just as significantly, a rising tide of foreclosures is flooding the market with homes, many of them at fire-sale prices as banks and troubled homeowners try to salvage what they can.

Lawrence Yun, an economist for the Realtors association, said he had expected the housing market to begin recovering by the middle of the year, but now thinks it is unlikely to happen until late this year.

In 2006, the median price of a home rose 1.1% from a year earlier, to $222,000.

Tighter Standards

In its latest forecast, the NAR said tighter lending criteria and fallout from the subprime loan debacle will, over time, lead to a healthier housing market with greater assurance that owners can handle mortgage adjustments, but higher loan standards will slow the housing recovery.

David Lereah, NAR's chief economist, said the changes are necessary for the long-term health of the housing market.

"We want people to be able to stay in their homes with mortgage terms they understand and can handle," he said. "Simply stated, a loan with the lowest monthly payment probably isn't in your best interests -- borrowers need to understand worst-case scenarios. If you're in a mortgage you aren't comfortable with, now is an excellent time to refinance, if you can, with historically low rates on safer conventional loans."

Last week, Freddie Mac reported the 30-year fixed-rate mortgage was 6.17 percent. The 30-year fixed rate should rise slowly to 6.6 percent by the end of this year, so borrowers who need to refinance should act soon.

"Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections. We still forecast 2007 to be the fourth highest year on record for existing-home sales, and housing remains a great long-term investment," Lereah said.

Existing-home sales are likely to total 6.34 million in 2007 and 6.52 million next year, in contrast with 6.48 million in 2006. New-home sales are seen at 904,000 this year and 935,000 in 2008, below the 1.05 million last year. Housing starts are estimated at 1.47 million in 2007 and 1.55 million next year, down from 1.80 million units in 2006.

"As home sales moderate, overall home prices will be essentially flat this year," Lereah said. "The good news is that inventories remain well below the levels experienced during the last housing downturn in the early 1990s, and supplies are close to balance in many areas."

The national median existing-home price will probably slip 0.7 percent to $220,300 in 2007, following a 1.0 percent rise last year. The median new-home price is projected to increase 0.4 percent to $246,200 this year, after gaining 1.8 percent in 2006. Modest growth is expected next year, with existing-home prices increasing 1.6 percent and new-home prices rising 2.0 percent.

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