Boom Cool-down? More Homes for Sale

Inventories have risen sharply in some of the hottest markets.
By: JAMES R. HAGERTY and KEMBA DUNHAM: The Wall Street Journal Online
The number of homes available for sale has increased sharply in some of the nation's hottest real-estate markets - one of several recent signs suggesting that air may be seeping out of the frenzied U.S. housing market.

Home prices have surged an average of about 50% in the U.S. in the last five years, largely thanks to the lowest mortgage interest rates in more than four decades and what has been a shortage of available homes in many markets. But some economists and housing-industry analysts believe supply is catching up with demand - a trend that could cause home-price appreciation to slow down in the months ahead.

In San Diego County, for instance, where the median home price has more than doubled in the last five years, the number of homes listed for sale totaled 12,149 on July 8, more than twice the 5,995 available a year earlier, according to the San Diego Association of Realtors.

In northern Virginia, an area dominated by the fast-growing suburbs of Washington, inventories are up 26% from a year earlier. "Sales have slowed down for sure," says Tip Powers, president of Realty Direct Inc., Sterling, Va. He says home prices have flattened out and speculators are starting to shy away from the market because they no longer can count on quickly unloading properties at a profit.

A similar rise is being seen in Massachusetts, where home inventories are up 31%, according to officials of real-estate organizations there. Real-estate brokers say inventories also are up in such markets as Chicago, Las Vegas and Orlando.

To be sure, housing demand has appeared to stall at previous moments in the boom only to pick up steam again. Judging the strength of the housing market is especially tricky in August, which is normally a slow month for home sales because so many people are on vacation. A year ago, inventories also were up at this point in the year, but supplies grew tighter in some cities later in the year and prices kept surging.

Economists and real-estate analysts say they won't be able to determine whether the market as a whole is slowing until September or October at the earliest, and note that housing conditions vary among communities.

Home builders continue to report strong sales and order backlogs in the new-home market. The National Association of Realtors recently reported that its index of pending sales in June was up 3.6% from a year earlier. (A sale is pending when a contract has been signed but the transaction hasn't been completed.)

Still, signs of a possible peak are appearing, perhaps in part a reaction to widely publicized warnings from Federal Reserve Chairman Alan Greenspan about "froth" in the housing market and a torrent of media reports about the "housing bubble."

"We're beginning to see that the housing market is cooling a little bit," says Mark Vitner, senior economist at Wachovia Bank in Charlotte, N.C., "but I stress a little bit."

The National Association of Realtors reported that 2.7 million "existing," or previously owned, homes were available for sale in June, up from 2.4 million a year earlier. At the current brisk rate of sales, the latest supply figure was enough to last 4.3 months, still considered a fairly small amount but up from 4.1 months a year earlier. If the sales rate slows, the inventory would start to look more plentiful.

"We're hearing from some really big Realtors that there is a little slowing [in the housing market] this month," says David Lereah, the chief economist for the Realtors' association.

If mortgage interest rates keep rising, as they have recently, home sales will slow, says Mr. Lereah. "Many times I have said housing has peaked, and I was wrong," he says. "Still, I think we've peaked and we will come down a little bit."

Meanwhile, builders have been putting up new homes at a breathtaking pace. New homes that either were completed or under construction totaled 354,000 in June, up from 320,000 a year before, according to the Census Bureau.

So far, many home builders say they can't keep up with demand and aren't worried about inventory levels. While they note that orders for new homes are soft in a few markets, such as Denver, South Carolina and the Washington area, there's continued strength in San Francisco, Las Vegas, Phoenix and South Florida.

But, warns Ivy Zelman, a housing analyst at Credit Suisse First Boston in New York, "If the music stops and the sales rate declines, then you're going to have a lot more supply" of new homes on the market.

Several factors point to a possible cooling of the market. Mortgage interest rates have been edging higher in recent weeks, raising the cost of purchasing a new home and knocking some potential buyers out of the market. The average rate for a 30-year fixed mortgage is 5.89%, said Freddie Mac, a mortgage-finance company, this week. That's up from 5.53% in late June.

In some markets, such as California and Florida, prices have surged past the ability of many people to afford a home. Additionally, banking regulators have begun to raise questions about whether mortgage lenders are being prudent enough - which eventually could prompt some lenders to tighten credit standards.

House prices have continued to rise partly because some lenders have promoted loans that help people buy houses they otherwise couldn't afford. For instance, Countrywide Financial Corp., the nation's largest mortgage lender, says that about a fifth of its home loans so far this year have been "pay option" mortgages. These loans give borrowers the option of delaying any repayment of principal and even paying less than the interest due some months, which results in a rising balance due.

But if regulators keep raising questions about the risks of such loans, that could push some potential home buyers out of the market, reducing demand, says Ms. Zelman.

George McCabe of Brown & Partners, an advertising and public-relations firm that compiles housing data, says that as prices continue to rise fast, more people are putting their homes on the market. "People want to cash in...so there is a lot of competition for resales," he says. He still sees the housing market as strong, adding: "We're just in an adjustment period."

At Wachovia, Mr. Vitner says supply and demand for houses are beginning to move into better balance. "That doesn't mean prices will be a bargain," he says. "It may mean they won't continue to rise in double-digit rates."

Ms. Zelman of CSFB says that prices in some cities are likely to decline at least modestly once the housing boom ends. She noted that housing booms in the late 1980s led to falling prices a few years later in California and New England.

- Jessica E. Vascellaro contributed to this article.

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