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Home Prices Plunge by Most in 35 Years

October 27, 2006

By Martin Crutsinger

Home Prices Plunge by Most in 35 Years

Source: Associated Press/AP Online Publication date: October 27, 2006

WASHINGTON (AP) - Is this what a housing bust looks like? New home prices fell last month by the largest amount in 35 years and owners are being warned to brace for further declines, especially in formerly hot markets.

After years of increases, some buyers say prices are still out of their range.

The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7 percent from September 2005.

That was the lowest median home price in two years and the sharpest year-over-year decline since December 1970, providing dramatic evidence of the slowdown in the once-booming housing market.

The median price is the middle point, where half sell for more and half sell for less.

The price decline for new homes followed a report Wednesday that prices in the much bigger existing home sales market also dropped on a year-over-year basis in September by 2.5 percent, the largest decline in records going back nearly four decades.

The price decline for new homes in September came while the sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes.

It was the second consecutive increase in sales following three months of declines. But even with the improvement, sales activity is down 14.2 percent from a year ago.

Some potential buyers are deciding to hold off in hopes prices will fall further.

Russell Saimons, a 37-year-old financial adviser in Seattle, said from what he could observe, home prices have not come down that much in his area but "they're not increasing like they were a year or two ago."

He said he eventually wants to buy a home but "it probably won't happen for two to three years" because he expects prices to keep coming down.

Latonya Barbery, 33, a medical assistant in Old Bridge, N.J., said she has looked for a home for the past 18 months but found them still too expensive.

"They're asking too much for these little shacks," she said in an interview with The Associated Press on Thursday.

A recent AP-AOL real estate poll found that 46 percent of those surveyed believed the housing market in their area was still overpriced.

On Wall Street, the big drop in home prices did not rattle investors as the Dow Jones industrial average climbed to another closing high. The Dow rose 28.98 points to end the day at a fourth straight record close of 12,163.66.

The sharp slowdown in housing follows an extended boom in which the lowest mortgage rates in four decades powered sales of both new and existing homes to records for five consecutive years, helping support the overall economy.

Analysts say further price declines are probable for both new and existing homes. A glut of unsold homes on the market is forcing builders to throw in expensive incentives such as granite countertops and swimming pools in order to sell homes.

"The housing market correction is in full swing but it probably has another year to go before it bottoms out," said Mark Zandi, chief economist at Moody's Economy.com. "It is going to be painful because there are a lot of price declines to come."

Zandi said he was forecasting that prices for existing homes would drop by 3.7 percent in 2007, which would be the first decline for a full year since the Great Depression.

For many of the formerly hot sales markets along the Northeast coast and in Florida, California and Arizona, the price drops could be particularly severe, given the double-digit price gains in those areas in recent years.

Zandi's firm is forecasting that prices would decline in 133 of the nation's 379 metropolitan areas.

Federal Reserve Chairman Ben Bernanke has estimated that this year's housing decline probably will cut growth by a percentage point in the second half of this year. The Fed raised interest rates for 17 consecutive times through June in hopes of slowing economic growth enough to restrain rising inflation pressures.

The Fed kept rates unchanged for the third straight month at a meeting on Wednesday. But officials gave no indication they were close to cutting rates because of the weakness in housing, saying they were still concerned that inflation is too high.

Many private economists believe the economy grew at a sluggish rate of around 2 percent in from July through September, the second straight quarter of slower growth. The government was releasing the actual figure on Friday.

Some analysts have worried that the bursting of the housing bubble could have a similar impact as the bursting of the stock market bubble in 2000, which contributed to the 2001 recession.

But former Federal Reserve Chairman Alan Greenspan told a Washington audience on Thursday that the economy will rebound after going through a "very weak patch" this summer.

"Most of the negatives in housing are probably behind us but we still have a way to go" before hitting bottom, Greenspan said. "We have too much inventory still."

Inventories of both existing and new homes did drop slightly in September but remain close to all-time highs.

The rise in new home sales last month reflected a 23.9 percent jump in the West and a 6.9 percent gain in the South. Sales plunged 34.5 percent in the Northeast and were down 6.3 percent in the Midwest.

In other economic news, the government said orders to U.S. factories for big-ticket manufactured goods soared by 7.8 percent in September, the biggest gain in more than six years. Virtually all the strength came from a huge jump in demand for commercial aircraft.

Associated Press writers Natasha Metzler and Jeannine Aversa contributed to this report. Copyright 2006 = Associated Press



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