Market unease: Home prices fall 3.5%

Home prices in Massachusetts fell 3.5 percent in July, the largest decline in 13 years, as the slowdown in the real estate market finally led sellers to cut their prices.

Sales of single-family homes began dropping last fall, but prices were slow to respond to the weakening demand.

Last month, though, the median sales price for a house fell to $361,750, from $375,000 a year earlier.

That decline was the biggest since the state's housing market was struggling in the wake of the banking woes of the early 1990s.

The number of condominium units sold in July tumbled by 21.4 percent, driving prices down 4.1 percent, the biggest decrease over the course of a year since December 1998.

The median condo price was $276,0000, compared with $287,900 in July 2005.

``It's a bad year," said Karl Case, a Wellesley College economics professor and housing-market specialist. ``Demand has dropped significantly, inventory is building, prices are falling, and less income is being earned."

``We've been saying it's going to happen for so long; it's happening. It's going to be painful."

During the real estate boom earlier this decade, prices increased 80 percent in Massachusetts, as low interest rates and a tight supply of housing pushed prices to levels that are among the most expensive in the country.

Massachusetts is not alone, though the sales slowdown began here before spreading to the rest of the country.

Nationwide, sales of existing homes fell to the lowest level in more than two years, and the number of homes on the market reached a record. Sales of houses, condos, town houses, and co-ops numbered 6.3 million units in July, at a seasonally adjusted annual pace, the National Association of Realtors reported. That was a 4.1 percent decline from June's sales, which were also revised lower.

The median US house price of $219,000 was slightly higher than a year earlier.

Gary Bigg, an economist with Bank of America Corp., said the run-up in real estate prices of the last several years made it difficult for a growing number of Americans to afford homes because their paychecks were not growing as fast.

That gap has curtailed demand nationwide, causing the market to soften, even in the midst of a growing economy.

Higher interest rates also increased the cost of buying a home. Freddie Mac, the federal mortgage agency, said the rate for a 30-year, fixed-rate mortgage is 6.5 percent, up from 5.8 a year ago.

And the Federal Reserve ``is probably going to raise the federal funds rate at least once and possibly two more times, which would mean a further weakening in housing affordability, which means further weakening in sales and in prices," Bigg said.

In Massachusetts, price declines add to the confusion among buyers afraid of overpaying, said Mark Gibbons, an agent with Re/Max Landmark Realtors in Stoughton.

``There's concern they don't want to lose any equity if they want to sell a couple years down the road," he said.

One of Gibbons' clients and a childhood friend, Kara Shea, and her fiancee, Dan MacEachern, plan to buy their first home before their Nov. 11 wedding. Their $330,000 price limit has made their search for a three-bedroom house difficult. They started in Quincy and Braintree, but learned they couldn't get enough of a yard in their price range in those communities.

They are now looking in Stoughton, Canton, and Easton -- ``anywhere where we can find something in the price range," Shea said.

The couple, who met through their work, at Reebok International Ltd. in Canton, became encouraged in late summer, because more sellers were cutting their asking prices. ``Week by week, it seems to be going down a little bit more here and there," MacEachern said. But, Shea added, ``the prices aren't that much lower."

Nancy Richards, a Coldwell Banker Residential Brokerage agent in Belmont, said sellers' attitudes have changed noticeably from last year, when they were ``still clinging to hopes" of selling at record prices. This year, ``they're taking offers that are lower and are happy about it."

But Newton agent Rona Fischman said many are ``still in denial." The steep drop in July sales ``tells me we're in the first year of the price declines," said Fischman, who is with Buyer Brokerage Realty. ``Sellers who really have to sell are waking up and smelling the coffee. There's more coffee coming."

That is little comfort to Edward Wagner, a security guard. An offer from him and his fiancee was recently accepted for a Jamaica Plain condo.

``It's possible we're standing at the edge of a cliff, and if we wait the bottom will drop out" of the market, Wagner said about predictions prices will fall further.

``We can't wait," he said. By Oct. 14, their wedding date, ``We have to have a place to live."

Kimberly Blanton can be reached at blanton@globe.com.