Golden State real estate loses luster

Part 4: Home sales, prices soften in California and rest of West
By: Dave Myers: Inman News
Editor's note: Though experts are divided over what the next 90 days may bring for the housing market as a whole, they all agree on one point: Each region of the nation has its own unique set of circumstances, and how those factors shape the attitudes of home buyers and sellers over the next several weeks will also help to decide how local home sales and prices will fare through the rest of this year and beyond. This four-part series looks at regional trends that are emerging as the peak spring home-buying season gets under way. (See Part 1, Part 2 and Part 3.)

For months, Los Angeles-based aerospace consultant Doug Roberts has stewed over a real estate deal that went sour last November.

It was bad enough that the seller first accepted but then rejected his full-price offer of $699,000 for the modest three-bedroom house near the airport, Roberts says, but even worse that the busy Realtor he was working with took three weeks to call him back to break the bad news.

"I was in limbo for almost a month, not knowing whether I had a deal or not," Roberts says. "The seller was a real jerk, and the agent wasn't any better."

But Roberts' anger turned into laughter last week, when the same Realtor he finally fired last December called to say that the previous deal with the other buyer had fallen apart and the house is now back on the market -- for $50,000 less than he offered to pay last fall.

Despite the price reduction, Roberts isn't biting. "I told the Realtor to get lost, and I told her to tell the seller the same thing," he says. "They treated me like garbage when the market was strong, but now it's a different story that sales are tanking.

"A year from now, that same house is probably going to be worth $200,000 less and the agent will be working at McDonalds."

Though Roberts may be exaggerating, it's clear that California's market is starting to cool after years of record-breaking sales that helped push prices in areas from San Diego to San Francisco up as much as 20 percent annually -- and sometimes even more.

February single-family resales across the state tumbled nearly 16 percent from year-earlier levels, the California Association of Realtors reports. Though prices were up 14 percent from a year ago, they fell nearly 3 percent from the previous month and were down about 6 percent from last year's peak of $568,890 in August.

The inventory of homes for sale more than doubled from a year earlier, to a 6.7-month supply. That's one of the highest inventory levels in years and suggests that the recent softening in values could continue, some economists say.

"There is no justification for the prices we're seeing now," Christopher Thornberg, chief economist at UCLA's Anderson School of Business, said when issuing the school's gloomy quarterly economic forecast last week.

Thornberg predicts that the downturn now under way will cost the state a staggering 200,000 jobs in the real estate and construction industries alone. And though he foresees a modest 6 percent gain in statewide home prices for this year, he also says they'll flatten in 2007.

Many Realtors say the spreads between asking and offering prices have already widened dramatically.

"Some sellers in markets that have had rapid appreciation are listing the price of their home too high, but those homes are just languishing on the market," says Thomas M. Stevens, senior vice president of brokerage giant NRT Inc. and president of the National Association of Realtors.

"At the same time, some buyers who have believed hype about a housing bubble are hoping prices will drop [sharply] but that's not happening either," Stevens says. "Both sides should adopt more realistic expectations."

The recent sales slowdown is affecting the way some brokerage firms divide their commissions. Instead of the typical 50-50 split between agents for the buyer and seller, Realtors who are working with one of the increasingly scarce number of prospective purchasers can sometimes get 75 percent or even more of the commission pie.

The softness in several California markets has also spurred more interest in "price-range marketing," in which sellers offer their homes in a range -- such as $475,000 to $525,000 -- instead of setting a fixed, predetermined offering price.

The concept was introduced in the mid-1990s but was largely ignored for the last several years, when sellers could instead set a firm price and often found multiple buyers willing to pay even more.

Perhaps the biggest proponent of price-range marketing is Prudential Real Estate, which claims that sellers who offer their homes in a general price range attract a broader group of prospective buyers. "It's like fishing with a net compared with a single hook," says Carlton Lund, a Prudential broker in the San Diego suburb of Carlsbad.

More than half of all closed sales in San Diego County last year involved range pricing, he adds, and it's growing more popular in other slowing markets as well.

The slowdown has also spread to new home markets across the West, especially at developments geared toward move-up buyers.

Denver-based MDC Holdings Inc. recently said that its fourth-quarter orders for new homes dropped 10 percent from a year earlier, with an even sharper 39-percent decline in Arizona. At some of its Arizona projects, incentives can equal 3 or 4 percent of the new home's purchase price, says CFO Gary Reece.

Beazer Homes USA recently offered reductions of up to $44,000 on about 100 of its completed but unsold homes in the Phoenix area. Many of the properties were already sold once but the buyers backed out, a company spokesperson says.

And upscale builder Standard Pacific Corp. of Orange County, Calif., blamed its 13 percent drop in orders during the first two months of the year on steep declines in California and Florida.

Yet, builders who focus on first-time buyers are also feeling the pain. KB Home, the West's largest builder of starter houses, recently said orders in its fiscal first quarter ended Feb. 28 were off 12 percent.

The weakness in demand for starter homes is particularly worrisome, analysts say, because a strong first-time buyers' market typically helps to fuel sales and prices of more expensive properties in both the resale and new-construction segments.

With rising mortgage rates continuing to knock thousands more buyers out of the market every month, "builders may still be too optimistic about the future," says Ivy Zelman, a leading analyst with Wall Street giant Credit Suisse Group.