The Basis for Home Price Decline; What Buyers Should Do About It

2006 was the first year of national median price declines since the National Association of Realtors began keeping figures in 1968.

Moreover, the NAR predicts that 2007 will also be a year of decline, which raises basic questions: What causes home prices to decline? Are buyers being pushed to the sidelines by the media or fundamentals?

A national housing market report? First, The Realty Times explains, there is no “national” market. Sales figures must be local in order to be meaningful, but that doesn’t mean that buyers don’t retreat out of fear, as well as market realities such as job loss, population outflows, and overbuilding.

According to the Joint Center for Housing Studies of Harvard University’s “State of the Nation’s Housing 2006,” overbuilding and job loss are preconditions for metro area housing price declines. Between 1975 and 1999, the percent of times that overbuilding and major employment loss led to price declines was nearly 8.3 percent and 4.5 percent, respectively.

Yet, conditions for buying and/or submitting a home loan application after 1999 changed:

Significant baby boomer wealth was poured into upsizing homesteads and purchasing second homes. GenXers came into their own with white collar jobs and stock market gains and were able to buy homes with less money down due to generous mortgage financing never before provided by lenders to previous generations.

Government subsidies continued in the form of low interest rates, hovering at 30-year-lows since 1998. Home buyer demographics also changed with more households forming, including record legal and illegal immigration. Single women homebuyers are now 22 percent of the market, up from 15 percent in the 90s.

By 2005, one in ten homeowners owned a second home.

Those positive conditions haven’t changed, but home buyers are moving to the sidelines nonetheless, most likely in reaction to double-digit price gains in many metro areas. Not only did affordability hit a wall, particularly for those seeking a California mortgage, but buyers simply lost patience with ever-escalating home prices.

That’s when a variable comes into play that has nothing to do with fundamentals: attitude.

Wall Street is on a roll with a record-flirting DOW, jobs are up, inflation appears to be under control with Federal Reserve rates standing pat, mortgage interest rates are low, and new home-building has slowed significantly.

Each of these is a strong buying signal for housing, yet, encouraged by the financial press and Wall Street pundits, buyers are being told to force home sellers’ prices down, even in areas that sat out the boom. And it’s working - prices are down for the first time since 1968.

For example, Dallas Realtor Mary O’Keefe says one of her clients refuses to take her advice when making offers. He prefers to listen to his Wall Street buddies who don’t live in the city and aren’t familiar with sold comparables.

“They’re telling him that he should offer $50,000 less than the asking price,” says O’Keefe, who has been showing the buyer townhomes. “Consequently, he’s lost out on two great properties with low-ball offers, but he just won’t accept that it’s his expectations are unrealistic, not the sellers. Properties are selling out from under him.”

Some buyers aren’t going to be happy unless the seller’s blood runs in the streets. It’s about winning, not buying a home.

Common sense dictates that when prices decline, that’s the time to jump in. Go send in that mortgage application! Buy low and sell high is what we all wish we could do, even if we don’t buy in at the lowest low or sell at the peak.

Realtors and home mortgage brokers working with buyers should be letting their clients know a basic economic fact of life: if fundamentals aren’t supporting a market decline, then it’s not going to decline for very long. If the nation and individual communities are adding jobs and population, a market decline is destined to be short-lived.

Price is a legitimate concern, but with growing inventories, buyers should be taking advantage of an abundant selection to improve their vantage points. In other words:

You may pay a little more for the house on the hill, but think of the alternative. In a buyer’s market, pickings are slim and if you want to buy, you take whatever’s on the market. There’s something to be said for getting the best home available for the money.