Market continues a slow adjustment

Markdowns were the order of the day in the residential real estate market this past year. But will it be more of the same for 2007? By year’s end, the market continued to be a lonely place. The number of home sales registered in November, for example, was the lowest since 1992. Prices continued to deteriorate, and the median single-family home statewide is now selling for around 13 percent less than the peak of the market in the summer of 2005. For a novel look at the market, we created a composite house drawn from details of a few three- to four-bedroom homes from nearby middle-class Boston suburbs that have been for sale for as long as six months. We asked three people from different perspectives to talk about where the real estate market is heading by predicting what will happen to our composite house.

Gregory K. Ingram

My prediction is that by May, the price of this composite house will decline by about 4 percent (around $426,000), part of a slow, continuing adjustment in housing markets in the Boston region.

The key factors behind this projected decline in the housing market are: no drop in interest rates, tightened access to mortgages including the sub prime market, and a continuing population decline in Massachusetts.

During the past 10 years housing prices in Eastern Massachusetts doubled while construction costs and middle-class incomes increased modestly. Prices have been buoyed in part by regulatory constraints that led to a sluggish increase in supply, and by an expectation that prices would continue to rise.

All that has al-ready started to change, of course. Prices have stopped rising, national housing starts are down nearly 30 percent, and time-to-sale has increased dramatically in local markets.

Looking ahead, it is unclear lower interest rates are in our future. Consumer prices are increasing well above the target range the Fed uses to gauge inflation. In addition, the Fed may need to maintain or increase interest rates to entice foreigners to continue holding dollars. In 2005, foreigners held almost half of marketable US Treasuries and nearly a third of US corporate debt.

But several oil-exporting countries have recently reduced their dollar holdings, and a continued move from the dollar could disrupt international markets and harm US interests -- so interest rates are more likely to rise than fall.

Access to mortgages is shrinking because the skyrocketing delinquency rate of sub prime mortgages -- around 8 percent in October -- is drying up the sub prime market.

On the population front, meanwhile, Massachusetts lost a quarter-million residents to other states in the first half of this decade, nearly all from Greater Boston . So there are likely to be fewer buyers shopping for this representative house in these communities.

Following Boston's last housing peak in 1988, prices fell about 25 percent, and took seven years to bottom out; the largest annual decline was about 8 percent. I know it's not comforting, but the reality is Boston-area housing prices are likely to continue to decline beyond the spring of 2007.

John Pesa

I believe this composite house will sell for $432,000, or about 2.5 percent off of the current asking price -- 13.5 percent off the original price.

This house has been on the market for four to six of the slower months of the current market. If it was originally priced right it would have sold. Typically well-priced homes six months ago got offers about 5 percent off asking. The market has dipped since then. Subtract more for the winter months discount and for a buyer who can do a quick close. If the sellers are stubborn, they could potentially chase the spiral down to 20 percent off their asking price. This price correction will have a different impact for different price ranges.

The basis of these assumptions has to do with today's fundamentals. Comparing logic of the '80s isn't exactly applicable because interest rates and incomes were totally different -- we had much higher inflation, for example. Doing your homework to get a better feel of today's economic conditions will keep you from mixing the wrong rules of thumb. A few years ago people were afraid that if they didn't jump in the real estate market right away they would be priced out, so they bought and hoped that they would be able to quickly grow into their mortgages (as their parents did). House prices went up, and went up faster than incomes.

Moreover, stretching to reach ever higher home prices became harder for people because costs of living such as heating, health care, property taxes, and transportation costs rose sharply. Many in the real estate and mortgage industry encouraged people to squeeze and overreach. During the buying frenzy it was easy money because people were confused and were easy prey. If you account for interest rates, house prices on average did not seem to go down until late spring. They have dropped significantly since then. We might get a slight spring seasonal lift in 2007, but I predict the market correction will continue until early spring of 2008.

Not only is there a market correction to contend with, but there are also other forces pushing downward on home prices. Among them is the changing ratio of buyers to sellers; people are moving out of Massachusetts, and the younger ones who are staying are waiting longer to have children and buy homes.

This price correction is good for our economic future because it offers broader opportunity through affordability.

David Wluka

Facing a decline in the real estate market after a decade of unprecedented growth, a seller's first question is: "Why won't my house sell quickly and for more?"

It looks like the owner of this composite house set the price without benefit of -- or more likely, ignoring -- a current market analysis. That's not unusual. Educating sellers and buyers about marketplace realities has been a daunting task for real estate brokers.

Sellers typically and wishfully set their sights on June 2005 when the market broke all records. It seems that everyone has a friend or neighbor who sold then and still hasn't stopped bragging about it.

The 11 percent price drop on this house, $499,000 to $444,000, is evidence of overpricing in a market that experienced only a 5 percent decline. Sales data for the Massachusetts market shows that homes in the $400,000 to $450,000 price range, like this one, that sold in 2006 went at 97 percent of list price (which in this case would be around $430,000), and 94 percent of the original price, and averaged 117 days on the market. In 2005, such houses sold slightly better, but averaged only 84 days on market, with m uch less than a 5 percent price decline.

In the midst of all this buyers pulled in their horns waiting for the "bubble" to burst. It didn't -- because there wasn't one. But it has taken a long time for buyers to realize that. Now, however, buyers are out there, prepared to act. It's impossible to target a sale date because it's not about selling at all -- it's about matching. A broker's job is to find prospective home buyers whose needs match the property. We may find the right buyer tomorrow or a few weeks from now. If the house is well promoted and priced appropriately, it will sell.

I anticipate the spring market to be robust as buyers who have been watching from the sidelines see that prices are stable, interest rates low, and there's still a good selection of homes to choose from. But that's changing. Housing inventory that was as high as 15 months of supply last February was down to 12.4 months in October and just 10.9 months this November. A "balanced" market is 7.5 to 8.5 months. We're getting there and the spring market isn't even here yet.

There are no crystal balls. A current competitive market analysis will define an appropriate asking price accompanied by a marketing program by the sellers' broker. I'd anticipate hard bargaining from savvy buyers.

Barring the right person walking in the door tomorrow, I would set the seller's expectations at an accepted offer in mid-March -- with a closing date timed to the school calendar -- at somewhere between 95 percent and 97 percent of the asking price, which in this case would be around $422,000 to $430,000.