Two distinct housing markets divide nation's buyers
By Thomas A. Fogarty
USA Today
Maybe the nation's housing market isn't so sizzling after all.
Consider Ralph Oakes, an IBM retiree who has tried for two years to sell his home near Austin, Texas.
In the past six months, Oakes has slashed his asking price by $34,000. He's had five offers, none within $50,000 of his latest asking price of $325,000. "It's definitely a buyers' market," laments Oakes, whose plans to build a place in rural Texas remain on hold.
Speculation has been rampant about a catastrophic real estate price bubble ready to burst, like the tech stock disaster of the last few years.
But a USA Today analysis of metropolitan home price trends suggests many markets already are cooling. Oakes' experience in Texas might be as typical of the national real estate scene as the seller whose quick flip of a house in a hot market produces a six-figure profit.
While home buyers in hot markets such as suburban New York City might be nagged by the possibility of having overpaid, millions of Americans are living in markets such as Austin, which are months — even years — into adjustments forced by local economic setbacks. That can be painful for those stuck with a house they don't want or those forced to sell at a loss.
But economists say such adjustments aren't necessarily a bubble. Nor, they say, does it mean that average home prices must decline.
The analysis suggests two distinct housing markets. One, comprising about a third of the population, consists of big, expensive, primarily coastal metro markets — New York, Boston, Los Angeles and San Francisco among them.
Prices there are high and still skyrocketing.
But the other market, home to about two-thirds of Americans, is marked by moderately growing, or in some cases, declining home prices.
Ten of the 15 large metro areas where prices are growing faster than the 7.4 percent national average have median sales prices well above the national norm, from $186,000 in Providence, R.I., to $541,000 in the San Francisco Bay Area.
By contrast, annual price growth in most of the nation's 50 largest metro areas in the April-June quarter lagged the average national growth rate. Another sign of widespread cooling: Most big metro areas recorded annual price growth rates during the quarter that trailed their own 2001 growth rates.
Cooling off
By historic norms, home prices should be rising by about 4 percent a year, or 2 percentage points ahead of inflation — not by the 7.4 percent measured by the National Association of Realtors in the April-June quarter.
But analysts say house bids have been fueled by mortgage rates so low that a $1,500 monthly payment — typical rent for an apartment in many big cities — can leverage $250,000 in borrowing.
Prices continue to grow moderately in Denver, Austin, Houston and Tampa. But they've gone from double-digit gains last year to growth rates that trail the national average.
Denver real estate agent Les Pfenning says modestly priced homes are selling briskly, but the market has lost the sense of urgency that "moves things to that next price level." Higher-priced home sales have slowed, and Pfenning says neighborhoods dependent on faltering telecom giants have been slammed. He says he's working with more distressed sellers, whose mortgage balance exceeds declining home value.
Recent buyer Holli Hartman, a lawyer, hadn't expected to find anything suitable for less than $200,000 near her downtown Denver office. But Hartman, 32, paid slightly more than the seller's $180,000 asking price to pre-empt another customer interested in her half-duplex, and she thinks she got a steal.
Similarly, price growth has slowed in the major Texas markets — Austin, Houston, Dallas/Fort Worth and San Antonio.
Two decades ago, Ted Jones, chief economist at Stewart Title in Houston, saw a bubble burst in the Texas real estate market. What's happening today, he says, is just a normal market adjustment.
In 1981, oil prices were high. President Ronald Reagan and Congress enacted a tax cut that made real estate development an attractive tax shelter. When energy prices crashed, Texas was left with a glut of homes and commercial buildings that took the rest of the decade to absorb, Jones says.
Austin, the Texas capital and home to 1.2 million metrowide, provides a glimpse of how a red-hot housing market throttles back. Home of giant computer manufacturer Dell, Austin was hit as badly as any city by the technology bust in 2000. The city lost 15,000 well-paying tech jobs last year.
Double-digit percentage growth in home prices vanished. The $161,000 median sales price in the Austin market for the April-June quarter is up just 3.8 percent from a year earlier.
It's that tech bust that has thwarted the efforts of Oakes, the retiree, to sell his house. Living a few miles from Dell headquarters in suburban Round Rock, Oakes says he's competing with developers who have overbuilt and are slashing prices to attract buyers.
Chris Heagerty, Austin director for broker eRealty.com, describes a spotty market where homes are taking longer to sell on average. It's neither the best nor the worst she's seen in a quarter-century of selling homes in Austin.
Burned in the slowing market, Heagerty says, were many of the twentysomethings who got rich quickly at Dell — the so-called Dellionaires — or another of Austin's many tech firms. The value of their high-end houses dropped further and faster than any other market segment. "There have been some hard lessons for people like that," Heagerty says.
Opportunities exist
But one reason the bottom rarely drops out of a real estate market is that moderating prices make houses accessible to new buyers. Austin resident Greg Beets and his wife, Kerri, both 33, were effectively priced out of the housing market during the boom years. He's a state employee; she's a teacher.
For more than a year, they kept a patient watch on Austin's Crestview neighborhood for just the right kind of house. They waited as one seller shaved $20,000 from an initial $169,000 asking price. Earlier this year, they negotiated a price of $140,000 for the house, which had been on the market six months.
"In '98 or '99, it probably would have been on the market for a couple of weeks and sold at full price," Greg Beets says.
Growth in other markets has been stratospheric. But buyers and market analysts in expensive and rapidly appreciating markets say the run-up isn't a frenzy, just the law of supply and demand.
In Suffolk and Nassau counties outside New York City, the fastest-appreciating real estate market in the country, prices grew at an annual rate of 30 percent in the April-June quarter. The growth propelled the median price — or the sales midpoint — to $307,000, vs. $157,700 nationally.
Celia Chen, housing economist at Economy.com, says builders there and in other big coastal markets are constrained in popular, close-in neighborhoods — and that drives up prices. Limitations include physical barriers such as shorelines, government regulations and the high cost of labor and materials.
Jack Kyser, chief economist at the Los Angeles County Economic Development Commission, says a fast-growing population in the region has fueled prices such as the 18 percent run-up registered in the April-June quarter.
Los Angeles County added 306,000 people over the 21 months ended Dec. 31. New housing permits over the same period: 35,000 units. Such imbalances repeat themselves across Southern California, Kyser says.
NAR's reports on metro price changes reflect fundamental shifts from the early years of housing's bull market, which began in 1996:
• The fastest price growth now comes in the most expensive markets — suburban New York, the San Francisco Bay Area and the like. Early on, the fastest growth was in the cheap markets just trying to catch up — places such as Kalamazoo, Mich.; Waterloo, Iowa; and Greenville, S.C. The result is a widening price spread between the nation's most- and least-expensive housing markets.
• Markets with the fastest price-growth rates smoke what formerly passed for fast growth. From 1996 until the end of 1999, none of the nation's fastest-growing markets exceeded 20 percent annually. Since then, the fastest growing markets have all advanced by more than 20 percent.
In fast-appreciating markets, buyers continue to line up, suggesting no end in sight to the price gains.
USA Today reporter Darryl Haralson contributed to this report.
