Dirty Little Secret - Home Prices Are Really Falling
http://www.nytimes.com/2006/08/25/business/25home.html?th&emc=th
Home sales are falling rapidly, and the number of houses on the market is surging. Yet each new economic report offering evidence of a housing slowdown also shows that the national median home price has continued to rise over the last year.
To understand how this could be happening, consider a three-bedroom house surrounded by oak and redwood trees, not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000, or an equal amount toward lease of a car.
In California, the Northeast, South Florida and parts of the Southwest, deal sweeteners like these are playing an increasingly important role in supporting home prices. From large national home builders to individual homeowners,
many sellers are offering thousands of dollars in perks, including straight cash, so they do not have to slice deeply into asking prices.
But these discounts are almost entirely missing from the statistics on new-home prices reported by the government and on existing-home prices reported by the
National Association of Realtors. As a result, home prices may now be falling, despite what the official numbers show, many economists say.
The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.
In July, the national median price — half sold for more and half for less — of a newly built home was $230,000, the Commerce Department said yesterday. That is 0.3 percent higher than the median price a year ago. The number of new-home sales fell 21.6 percent over the last year, with the sharpest drop occurring in the Northeast.
Mark Zandi, the chief economist of Moody’s
Economy.com,
estimated that incentives might now be equal to as much as 3 percent of the effective prices of houses across the country, on average. But he and other economists said there was simply no way to know for certain.
“We don’t have any house price indexes that get it right,” said Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania.
Incentives are most common in the new-home market, where builders are under financial pressure to sell empty homes and, as large businesses, have the ability to absorb the financial hit. Depending on the market, executives at the nation’s biggest builders say the giveaways can equal 3 percent to 8 percent of a home’s sale price. If builders instead reduced asking prices by that much, it would be enough to wipe out the year-over-year price gains in many markets. Last year, by contrast, many builders were selling out new subdivisions and condominiums in hours or days, often in auctions.
“If you were going to sell the house exactly the way it was before, you would be looking at a price decline,” said David Seiders, chief economist at the National Association of Home Builders.
Mr. Zandi, the economist, said he believed that
the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993.
The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts.
“The reason the Realtors’ data has never showed an outright decline” before, he said, “might be that they’re not measuring the effective price.”
Builders tend to choose discounts because they worry that reductions in the list price would send a clear signal that the market is in trouble, potentially angering previous buyers and emboldening future customers.
“They already sold the same product to the guy next door and if they reduce the price he is going to scream,” Mr. Dew said. He added that many builders were also offering agents bonuses worth tens of thousands of dollars in finders’ fees for bringing in buyers.
In effect, the
incentives have become a quiet way to cut the price of houses without further damaging the market. Sellers “don’t want to create this environment of fear in the market that prices are going down, so you should wait to buy,” said Dean Baker, co-director of the Center for Economic Policy Research in Washington, who believes that prices will fall in coming years.
Lenders are also wary of incentives. Lenders do not want to finance transactions where the sales price exceeds the true value of the home.
Fannie Mae, the large buyer of mortgages,
requires disclosure of perks and it caps them on a sliding scale from 2 percent to 9 percent of selling prices, depending on whether buyers will live in the home and based on the size of the down payment. The concerns of lenders will eventually limit the size of incentives in home sales, said Anthony Hsieh, president of
LendingTree.com, the Web loan site. Many buyers may also balk because their property taxes will be based on the sales price listed on the contract.
Eventually, buyers will realize “there is no free lunch,” he said. “There is a reason it’s being given away.”
