The median price of Americanhomes is expected to fall this year for the first time since federalhousing agencies began keeping statistics in 1950.
Economists say the decline, which could be foreshadowed in a widelyfollowed government price index to be released this week, will probablybe modest — from 1 percent to 2 percent — but could continue in 2008and 2009. Rather than being limited to the once-booming Northeast andCalifornia, price declines are also occurring in cities like Chicago,Minneapolis and Houston, where the increases of the last decade weremodest by comparison.
The reversal is particularly striking because many governmentofficials and housing-industry executives had said that a nationwidedecline would never happen, even though prices had fallen in somecoastal areas as recently as the early 1990s.
While the housing slump has already rattled financial markets, ithas so far had only a modest effect on consumer spending and economicgrowth. But forecasters now believe that its impact will lead to aslowdown over the next year or two.
“For most people, this is not a disaster,” said Nigel Gault, aneconomist with Global Insight, a research firm in Waltham, Mass. “Butit’s enough to cause them to pull back.”
In recent years, many families used their homes as a kind of piggybank, borrowing against their equity and increasing their spending morerapidly than their income was rising. A recent research paperco-written by the vice chairman of the Federal Reserve said that therise in home prices was the primary reason that consumer borrowing hassoared since 2001.
Now, however, that financial cushion is disappearing for manyfamilies. “We are having to start from scratch and rebuild for a downpayment,” said Kenneth Schauf, who expects to lose money on acondominium in Chicago he and his wife bought in 2004 and have beentrying to sell since last summer. “We figured that a home is the placeto build your wealth, and now it’s going on three years and we are backto square one.”
On an inflation-adjusted basis, the national median price — thelevel at which half of all homes are more expensive and half are less —is not likely to return to its 2007 peak for more than a decade,according to Moody’s Economy.com, a research firm.
Unless the real estate downturn is much worse than economists areexpecting, the declines will not come close to erasing the increases ofthe last decade. And for many families who do not plan to move, theyear-to-year value of their house matters little. The drop is, ofcourse, good news for home buyers.
It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 reportjointly written by the top economists at five organizations — theindustry groups for real estate agents, home builders and communitybankers, as well as Fannie Mae and Freddie Mac,the large government-sponsored backers of home mortgages — was typical.It said that “there is little possibility of a widespread nationaldecline since there is no national housing market.”
Top government officials were more circumspect but still doubted that the prices would decline nationally. Alan Greenspan,the former Fed chairman, said the housing market was not susceptible tobubbles, in part because every local market is different.
In 2005, Ben S. Bernanke,then an adviser to President Bush and now the Fed chairman, said“strong fundamentals” were the main force behind the rise in prices.“We’ve never had a decline in housing prices on a nationwide basis,” headded.
But Global Insight, the research firm, estimates that the home-price index to be released Thursday by the Office of Federal Housing Enterprise Oversight,a regulatory agency, will show a decline of about 1 percent between thefirst and second quarter of this year. Other forecasters predict thatthe index will rise slightly in the second quarter before falling laterthis year.
In all, Global Insight expects a decline of 4 percent, or roughly 10percent in inflation-adjusted terms, between the peak earlier this yearand the projected low point in 2009. In California, prices are expectedto decline 16 percent — or about 20 percent after taking inflation intoaccount.
The government’s index, which compares the sales price of individualhomes over time, is intended to describe the actual value of a typicalhouse. Since the index began in 1975, it has slipped from one quarterto the next on a few occasions, but it has never fallen over a fullyear.
Another index dating back to 1950, calculated by Freddie Mac, has also never shown an annual decline. Price data
Mr. Schauf and his wife, Leslie Suarez, put their condo in theSheridan Park neighborhood of Chicago up for sale shortly before movingto Texas last year so he could take a new job. They bought thetwo-bedroom unit in September 2004 for $255,000, with a 5 percent downpayment. They redid the floors, installed new window treatments andrepainted the walls.
They said they expected the condo to sell quickly. Instead, theyhave cut the price several times and have yet to receive an offer. Thecurrent list price is $279,000, though they expect to settle for less.
Without the money for a new down payment, they are renting anapartment in Austin. They also expect the monthly payment on theiradjustable-rate mortgage to go up $200 in October.
Ms. Suarez, who grew up in the Dallas-Fort Worth area, says she isnot as surprised because she remembers home prices falling after theoil bust in the late 1980s. “Growing up in Texas, real estate has neverbeen a windfall,” she said. “For me, I always just wanted to breakeven.”
Housing prices have previously declined for long stretches invarious regions. Most recently, prices fell in California and in theNortheast during the recession of the early 1990s.
The current slump is different from that one, though, in both depthand breadth. In fact, the national median price rose only slightlyfaster than inflation from 1950 to the mid-1990s.
But as interest rates fell and lending standards became looser,prices started rising rapidly in the late 1990s, even in places likeChicago, which had rarely seen a real estate boom. The result was a“euphoric popular delusion” that real estate was a can’t-missinvestment, said Edward W. Gjertsen II, president of the FinancialPlanners Association of Illinois. “That’s just human nature.”
Many families are clearly richer because of the boom. In the OldTown neighborhood of Chicago, the town house that Ian R. Perschke, atechnology consultant, and Jennifer Worstell, a lawyer, bought in late2004 has appreciated more than 30 percent, they estimated. The gain wasbig enough to allow them to take out a larger mortgage and renovate tworental units in the house. But Mr. Perschke said he understood that hewas “not going to see that appreciation over the next three years.”
Prices in Chicago peaked in September 2006 and have since dipped 1.7percent, according to the Case-Shiller home-price index, which istabulated by MacroMarkets, a research firm.
For all the attention that the uninterrupted growth in nationalhouse prices received, some economists argue that it was misplaced. TheCase-Shiller index, which many experts consider more accurate than thegovernment measure, did show a drop in prices in the early 1990s.(Unlike the government’s measure, it includes mortgages of more than$417,000, which are not held by Fannie Mae or Freddie Mac.)
After adjusting for inflation — the most meaningful way to look atany price, economists say — even the government’s index fell in theearly 1990s.
Dean Baker, an economist in Washington who has been arguing for the last five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.
“It was very misleading,” said Mr. Baker, co-director of the Centerfor Economic and Policy Research, a liberal research group. There are alot of people, he said, who bought “homes at hugely inflated prices whoare going to take a hit. You also have a lot of people who borrowedagainst those inflated prices.”
Perhaps the most prominent housing booster was David Lereah, thechief economist at the National Association of Realtors until April. In2005, he published a book titled, “Are You Missing the Real EstateBoom?” In 2006, it was updated and rereleased as “Why the Real EstateBoom Will Not Bust.” This year, Mr. Lereah published a new book, “AllReal Estate Is Local.”
In an interview, Mr. Lereah, now an executive at MoveInc., which operates a real estate Web site, acknowledged he had gottenit wrong, saying he did not fully realize how loose lending standardshad become and how quickly they would tighten up again this summer. Buthe argued that many of his critics have also been proved wrong, becausethey were bearish as early as 2002.
“The bears were bears way too early, and the bulls were bulls toolate,” he said. “You need to know when you are straying fromfundamentals. It’s hard, when you are in the middle of the storm, toknow.”
