Finally, somebody willing to admit the obvious!
Moody's foresees a third of cities hit
By Mike FreemanUNION-TRIBUNE STAFF WRITER
October 4, 2006
With home sales slowing and inventories of unsold homes rising, a new report predicts that housing prices will fall in about a third of the metropolitan areas in the United States, including San Diego. But the forecast by Moody's Economy.com, a private research firm, doesn't predict a crash in housing prices in a vast majority of the nation's cities, including San Diego.
The report, released yesterday, projects prices for new and resale single-family homes to drop 8.5 percent in San Diego from the market peak at the end of 2005 to the first half of 2008, when the market is predicted to hit bottom.
Prices have already declined locally in the first and second quarters of this year, said Brian Carey, an economist with Economy.com who worked on the report.
Sellers, particularly new-home developers, have been cutting prices as homes have lingered on the market and buyer demand has slowed. “They do have a lot of excess supply right now,” Carey said of San Diego.
The region, however, wasn't among the cities where prices are forecast to decline the most. It ranked 37th in the report. Danville, Ill., was projected to see the biggest percentage drop in home prices at 18.7 percent. It was followed by Fort Myers, Fla.; Reno, Nev.; Merced and Stockton.
Condos were excluded from Economy.com's forecast because it lacked good data, Carey said.
In areas like San Diego, however, condos may be more vulnerable than single-family homes to steep price declines because of the unprecedented construction of new units downtown and elsewhere, as well as a glut of condo conversions either for sale today or planned in the near future.
“We realize the condo market could be hit harder,” Carey said.
Nathan Moeder, an analyst with San Diego real estate consultant The London Group, said it's not surprising that home prices would be falling now that buyers are being cautious.
But he doubted that any forecast could accurately predict how much prices might drop. That's because it's difficult to say what the future holds for interest rates, job growth and other factors that contribute to housing demand.
“We've already seen adjustments by developers, not only with incentives but also price decreases because they have to sell their units,” said Moeder. “But is it going to drop zero or 10 percent? Who knows? Moeder added that if Economy.com is correct, an 8.5 percent decline would not be significant for most homeowners given the sky-high appreciation in San Diego since 2000.
The median home value for San Diego homes, adjusted for inflation, rose to $567,000 from $249,000 between 2000 and 2005, according to the U.S. Census Bureau. It was the largest increase among the country's biggest cities.
“Think about how much equity and paper wealth has been created for these people over the last five years,” Moeder said. “So an 8 percent decrease is not a big deal.”
Nationwide, Economy.com projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first decline for an entire year in home prices since the Great Depression of the 1930s.
The report projected that 133 of the nation's 379 metropolitan areas would suffer price declines.
That is quite a contrast from the past five years when low mortgage rates pushed sales to five consecutive annual records, and prices in the hottest sales areas skyrocketed.
The forecast is included in a 195-page report, “Housing at the Tipping Point.”
Some analysts are worried that the slowdown could become so severe that it could drag the entire country into a recession, much like the bursting of the stock market bubble in 2000 led to the 2001 slump.
The 133 areas with slumping prices are concentrated in the states of California and Florida and the Northeast corridor from southern Maine to just south of Washington, D.C., as well as boom areas of Nevada and Arizona and some depressed sections of the Midwest, such as Detroit.
Of the areas with falling prices, 72 were forecast to hit their low point by the end of this year, with the rest seeing a trough for prices in 2007, 2008 or even as late as 2009.
But even in areas that have already hit a low point for prices, the rebound isn't expected to occur quickly.
“Prices are going to go down and stay down for a while. It will take at least a couple of years to work off the excesses of the last decade,” said Mark Zandi, chief economist at Moody's Economy.com and the principal author of the report.
The report described the current environment as a “correction” and not a “crash,” but it cautioned that there were downside risks that could make the slowdown more serious.
“We believe the housing downturn will weigh on the economic expansion, but will not break it . . . ” Zandi said.
The Associated Press contributed to this report.
