October Existing-Home Sales Decline 2.7 Percent

While homebuyers gravitated to new homes in October, a measure of existing home sales declined 2.7 percent for the same month, to a seasonally adjusted annual rate of 7.09 million units, according to the National Association of Realtors.

David Lereah, NAR's chief economist, said markets are getting into better balance between demand and supply. "We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing. Housing activity has peaked and is coming down a bit, and we expect further cooling in the coming months. We feel confident that housing is landing softly as rates continue to rise."

The national median existing-home price for all housing types-- including single-family, townhomes, condominiums and co-ops--was $218,000 in October.

Total housing inventory levels rose 3.5 percent at the end of October to 2.87 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace. A Reuters report states that is the highest inventory of homes on the markets since 1986.

Regionally, existing-home sales fell 1.2 percent in the West in October to a pace of 1.64 million, and were 3.8 percent higher than October 2004. The median price in the West was 316,000, up 16.2 percent from October 2004.

Total existing-home sales in the South declined 1.8 percent to an annual sales rate of 2.76 million units in October, and were 7 percent above October 2004. The median price in the South was $196,000, up 18.1 percent from a year ago.

Existing-home sales in the Midwest fell 1.9 percent to annual pace of 1.58 million units in October, and were 1.3 percent higher than a year ago. The median price in the Midwest was $170,000, which was 10.4 percent higher than October 2004.

Total existing-home sales in the Northeast declined 7.4 percent to a pace of 1.12 million units in October, and were unchanged compared to a year ago. The median existing-home price in the Northeast was $252,000, up 10.5 percent from a year ago.

Existing home sales down nationally

Sales of previously owned homes fell by 2.7 percent nationally in October as the housing market continues to signal that the boom of the past five years is ringing more hollow these days.

The National Association of Realtors reported Monday that sales of existing homes and condominiums declined by 2.7 percent last month to a seasonally adjusted annual rate of 7.09 million units. The decline would have been an even larger 3.2 percent without a spurt in sales in areas where people displaced by the Gulf Coast hurricanes have moved.

Even with the decline in sales, the median price of an existing home sold last month rose by 16.6 percent to $218,000 compared to the median -- or midpoint -- price in October 2004.

Prices Keep Rising As Home Sales Fall

The mounting evidence that home sales are slumping has been attracting attention. Inventories of homes for sale are up across the east coast region, houses are sitting on the market longer, and buyers are more sparse at open houses.

But according to newly released data from the National Association of Realtors, the prices paid for houses in the area kept rising in the third quarter. Among existing single-family homes that changed hands in the three months ended in September, the median sale price was $441,400, a record. That's up from $349,400 a year earlier, a 26 percent increase, and up from $429,200 in the second quarter of the year.

Washington had the 13th-highest pace of appreciation among all metropolitan areas. So how can the rapid appreciation in housing be reconciled with what looks like a slowing market?

Home sales are recorded when the transaction closes, meaning that many of the sales recorded during the third quarter were negotiated back in the spring and early summer, when the market was still booming.

Real estate prices also are "sticky," meaning that many sellers would rather leave a home on the market for a good while than take what they consider a too-low price. So if the housing market continues to weaken, there may be fewer transactions taking place but prices may remain elevated, as appeared to be the case in late summer.

Builders offer handsome upgrades to lure buyers in a slowing market

Just flipping through the pages of a local real estate section and you'll see the enticing ads from home builders offering special incentives such as free landscaping, closing costs or appliances.

It's not a new phenomenon. Builders always provide more buyer incentives as a year closes and they need to get rid of their speculation homes and unsold inventory. Another factor this year, though, is that the new home construction market is cooling after record-setting sales.

Promotional efforts are increasing nationwide as demand in the real estate market falls. Though metro Detroit never experienced the housing booms that California, Florida and the Northeast had with their skyrocketing home appreciation in recent years, home construction has played a large role in keeping the economy afloat here. According to the Southeast Michigan Council of Governments (SEMCOG), 25,362 new residential building permits were issued in the region last year.

"When you see record-high sales, you expect the market to pull back a little," said Darshan Grewal, president of Singh Homes of West Bloomfield. "And here in Michigan we're seeing the automotive job sector deteriorating, something that is causing a big concern for potential home buyers."

Such low consumer confidence has single-family home builders adjusting their market expectations downward, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released Wednesday. The index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either good, fair or poor. The survey also asks builders to rate traffic of prospective buyers as either high to very high, average, or low to very low. Scores are used to calculate the index; any number over 50 indicates more builders believe sales conditions are good as opposed to poor.

Though builders nationwide still have a favorable perspective at 60, the news isn't as good in the Midwest. The HMI for Midwest builders dropped seven points, from 45 to 38.

Singh Homes is one of the luckier ones. They expect to set another record in 2005 and close the year with about $70 million in sales, a 25% increase from last year.

Still, it's the lure of long-term savings that builders hope will persuade buyers they can and should purchase now and not worry later -- especially as interest rates creep up and make it more expensive to buy a high-end home.

In one recent luscious deal, Pulte Homes, based in Bloomfield Hills, advertised a free gas fireplace, free main-level hardwood floors, free upgraded cabinets and a free washer and dryer at one upscale development in Maryland. Also, it offered a choice of free heat for six months, a free 42-inch plasma television set or free window coverings worth $5,000.

Still, buyers should be aware that in such high-end homes, upgrades like hardwood floors, fireplaces, cabinets and appliances are standard, and included in the price. The true buyer incentives in this deal were the heat, television and window treatments.

Most incentives are intended to maximize their value with a specific buyer segment, said Melanie Hearsch, Pulte's corporate communications manager.

"For example, a first-time buyer might be more motivated by incentives tied to the mortgage or base cost of the house, where a move-up buyer might be more excited by better pricing on options and upgrades such as landscaping packages," Hearsch said in an e-mail to the Free Press.

"At our Liberty Park townhome community in Novi, a popular incentive among our first-time buyer demographic is a complete move-in package offering a washer and dryer, other select appliances, blinds and window treatments -- items that will save the new homeowner from having to spend that money out-of-pocket after move-in."

A September survey of 488 single-family home builders by the National Association of Home Builders found that 58% were offering sales incentives, excluding price, compared with 51% six months earlier.

Dominic Moceri, president of the Building Industry Association of Southeastern Michigan, said the fourth quarter always inspires builders to offer incentives. Smaller upgrades might be light fixtures and carpet, he said.

"Builders also reward people putting down larger down payments by taking cash off the top of the purchase price or offering additional upgrade incentives," Moceri said. "Builders offer year-end incentives to close out inventory and rev up building activities for the start of the new year."

Home buyers might have to ask whether a builder is promoting any special deals, as not all builders publicize the offerings. And builders may be more responsive to negotiations if you request home upgrades as opposed to a price reduction.

Rising mortgage rates cooling off five-year boom

Housing construction and new building permits were down sharply in October, providing fresh evidence that rising mortgage rates are beginning to cool the five-year housing boom.

The Commerce Department reported yesterday that construction of new homes and apartments fell by 5.6 percent last month, the biggest decline in seven months.

Applications for new building permits, a good sign of future activity, fell by 6.7 percent, the biggest decline in six years.

Analysts said these weaker-than-expected figures, combined with evidence homes are staying on the market longer, indicate the hot real estate market is cooling off.

''We are likely to see a steady downward trend in housing activity over the next few months all tied to rising mortgage rates," said Nariman Behravesh, chief economist at Global Insight, a Lexington, forecasting firm.

The fear is that home values have soared to such high levels that a slowing in demand could cause those prices to drop sharply, raising risks to recent purchasers who could end up with mortgage burdens that are higher than the falling values of their homes.

Behravesh doesn't see that happening, saying higher mortgage rates ''should serve to cool the market down without precipitating any kind of nasty scenario."

The National Association of Realtors reported Tuesday that 69 cities around the country saw double-digit price gains during the July-September quarter, compared with the same period a year ago, led by a 55.2 percent surge in the Phoenix area and a 44.8 percent jump in Fort Myers, Fla.

Nationally, median prices for existing homes were up 14.7 percent in the third quarter compared with a year ago.

By region, construction starts were down 10.8 percent in the West, 10.5 percent in the Midwest, 7.5 percent in the Northeast, and 0.5 percent in the South.

Realtors, Brokers Decry Reducing Homeowners' Tax Benefits

Realtors and mortgage brokers decried recommendations by a federal tax reform commission to reduce some tax benefits now enjoyed by homeowners, saying they discourage homeownership and endanger the national economy.

But there is not unanimous agreement among tax and housing professionals on how deeply, if at all, the reforms would harm homeowners or the housing industry.

The industry enjoys a disproportionately favorable treatment under the tax code, according to a Nov. 1 report by the President's Advisory Panel on Federal Tax Reform, the culmination of 10 months of work to simplify the federal tax code. Housing was just one of many issues recommended for reform.

Tax benefits for homeownership go largely to the nation's wealthiest citizens, with more than half of the estimated tax expenditure for home mortgage interest deductions flowing to the 12 percent of taxpayers who had cash incomes of $100,000 or more last year, the report said.

The tax preferences that favor housing exceed what is necessary to encourage home ownership or help more Americans buy their first home, the report said.

Currently, homeowners can deduct from their taxes interest paid on up to $1 million of mortgage debt on a first or second home, according to the report. Homeowners can also deduct interest on home equity loans of up to $100,000.

The panel recommended eliminating tax deductions for second homes as well as replacing deductions on first homes with an across-the- board Home Credit equal to 15 percent of interest on a principal residence.

The panel would also limit the Home Credit based on the average cost of housing within the taxpayer's area, changing current limits of $1 million to between about $277,000 and $412,000.

Realtors nationally argue that such limits would cost the typical homeowner up to $30,000 in equity.

The result would dampen homeownership, said Alan Ingraham, president of the Maryland Association of Realtors.

It would also cause residential property values to fall by 15 percent, according to statistics from the National Association of Realtors.

Many people have utilized real estate to establish equity for themselves, which is no longer there from a pension fund, Ingraham said.

Company pension plans are becoming increasingly sparse, Ingraham said, making personal property values even more important to Americans reaching retirement age.

With the aging of America, that is something they should be extremely concerned about as well, Ingraham said.

In Maryland, the housing industry comprised 14.2 percent of the total gross state product, Ingraham said. Nationally, that number is about 15 percent, he said. A crash in the housing industry could likewise crash the economy, he said.

Christopher Scott, a tax attorney for Baltimore-based Gordon Feinblatt Rothman Hoffberger & Hollander L.L.C., agreed that the proposed reforms would be detrimental to national housing, although he did not share the Realtors' doomsday scenarios.

It will mean that a few more people will be unable to afford their own homes, but I don't think it would be a dramatic shift, Scott said.

I think what would happen is that the cost of housing would go down a bit because people would be less able to afford mortgages, he said.

But the presidential panel argued that the reforms would actually save more low-income earners money on mortgage interest, noting that only 54 percent of taxpayers paying interest on their mortgages receive a tax benefit.

Under the new proposal, millions of Americans would be able to claim a tax benefit for home mortgage interest for the first time, which would make owning a home more affordable, the report said.

The panel seems to really keep going back to this idea that the homeownership benefit should exist, but it should be shared more evenly, said Linda Couch, the coalition's deputy director.

I think that many lower-income households do not itemize their tax deductions and are therefore not aware of the benefit they are missing out on, she said.

The Treasury Department will review the panel's recommendations and come up with a final plan that the president is expected to push in Congress next year.

Scott doubts the mortgage reforms in particular would pass as law.

Ultimately, I think this is a political nonstarter, Scott said.

Tax benefits for homeowners are very popular with voters, he said.

New housing down substantially as mortgage rates rise

Home construction plunged 5.6 percent in October, providing dramatic evidence that rising mortgage rates are beginning to dampen the housing boom.

In other economic news, output at the nation’s factories, mines and utilities rose at the fastest pace in 17 months in October, posting a solid rebound from the devastating Gulf Coast hurricanes.

The Federal Reserve reported industrial output was up a healthy 0.9 percent last month as refineries and oil and natural gas platforms recovered from the damage caused by hurricanes Katrina and Rita.

Last month’s increase followed a 1.5 percent plunge in September, which had been the biggest one-month drop in industrial production in more than two decades.

The Fed’s report on industrial production showed that manufacturing output was up 1.4 percent last month, the biggest increase in six years, reflecting not only increased activity after the hurricane shutdowns but also the end of a strike at aircraft manufacturing giant Boeing.

The strong increase in manufacturing output offset a 1.9 percent drop in output at the nation’s utilities and a 0.5 percent drop in mining output.

The drop in home construction came as mortgage rates were climbing in October. Mortgage rates continued to climb this month.

Freddie Mac reported Thursday that the national average for 30-year mortgages rose to 6.37 percent this week, up slightly from 6.36 percent last week. It was the 10th consecutive weekly increase and put the 30-year mortgage at its highest level in more than two years.

Analysts believe that rates will climb even higher in coming months as the Federal Reserve keeps tightening credit in an effort to make sure that this year’s surge in energy prices does not spell broader inflation problems.

The October decline in housing, the biggest since a 17.7 percent drop last March, showed slower construction of single-family and apartment dwellings.

Single-family homes were being built at an annual rate of 1.68 million units last month, down 4.9 percent from the September level. Construction of multifamily units fell by an even larger 13.7 percent to an annual rate of 390,000 units.

In a sign of potential weakness in the future, the number of building permits issued in October dropped by 6.7 percent to an annual rate of 2.07 million units.

The weakness in construction was widespread across the country, led by a 10.8 percent drop in the West.

Construction was down 10.5 percent in the Midwest to an annual rate of 333,000 units and down 7.5 percent in the Northeast. Home construction fell 0.5 percent in the South.

Government analysts said the hurricanes that hit Gulf Coast states did not have a significant impact on building in the region last month.

Private-sector analysts believe that rebuilding from the storms will boost construction but that this positive effect will not be felt for several more months.

Another economic report showed the number of Americans who have lost jobs because of hurricanes Katrina, Rita and Wilma rose by 19,000 last week to a total of 561,400. That increase was down slightly from the 21,000 hurricane-related claims that had been filed in the previous week.

Storm-related claims peaked at 108,000 in the third week in September and have been declining since then.

Total jobless claims throughout the country fell by 25,000 last week to 303,000, the lowest level since mid-April and a sign that the labor market is shaking off the impact of the hurricanes.

Housing Permits and Starts Drop

A sharp drop in U.S. housing starts and permits for new building in October pointed to some cooling in the red-hot real estate market, but the industrial sector picked up steam, government reports showed Thursday.

A third report found factory activity in the mid-Atlantic states slipped a bit more than expected in November as new orders declined, but employment improved.

The Commerce Department said housing starts fell 5.6% to a 2.014-million-unit annual rate, while permits for future groundbreaking fell 6.7% — the biggest decline in six years.

It was the latest in a series of reports hinting that an anticipated slowdown in the five-year U.S. housing boom might have arrived.

"Gulf Coast rebuilding will help limit the softening, but the cyclical turn in housing is here," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

With rising mortgage rates beginning to bite, economists had expected some slowing in housing figures, but they noted the overall level of housing starts is not weak by historical standards.

"In reality, starts have held steady above 2 million for the seventh straight month, and are quite strong in the face of rising interest rates and falling affordability," said Wachovia economist Gina Martin.

Economists are watching housing closely because an expected cooling could crimp consumer spending and slow overall economic growth.

A separate report from the Federal Reserve showed a 0.9% bounce in industrial output from U.S. factories, mines and utilities in October.

It was the fastest rate since May 2004 as business recovered from hurricanes and a nearly monthlong aircraft workers' strike was settled.

"The rebound in manufacturing output was stronger than generally thought. A lot of it is concentrated in aircraft," said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein, noting the end of a strike at Boeing Co. contributed to a 37% surge in one subcategory.

The more recent report from the Philadelphia Fed showed regional output softened in November, with the business activity index falling to 11.5 in November from 17.3 in October.

But economists emphasized that these growth levels were respectable and noted the index tended to be volatile.

"The details of this report suggest less of a slowing in manufacturing growth than the headline index. Growth in manufacturing remains relatively robust," said Bear Stearns chief economist John Ryding.

None of the reports Thursday was considered soft enough to dissuade the Federal Reserve from further interest rate hikes in its bid to keep a lid on inflation pressures.

Another economic release Thursday showed the number of U.S. workers filing for initial jobless claims fell sharply last week, hitting the lowest level since April and fully recovering from the effect of the recent hurricanes.

First-time claims for state unemployment insurance benefits dropped 25,000 to 303,000 last week, the Labor Department said, below expectations, and suggesting the next payroll employment report could top 200,000.

Climbing mortgage rates concern markets

Rates on 30-year mortgages jumped to the highest level in more than two years as financial markets grew more concerned about inflation.

Mortgage giant Freddie Mac reported that the nationwide average for 30-year, fixed-rate mortgages rose to 6.36 percent, up from 6.31 percent last week. That was the highest level since 30-year mortgages were at 6.44 percent in early September 2003.

"News that wages grew faster than had been expected in October reinforced fears of inflation in the financial markets and that bumped up interest rates again," said Frank Nothaft, Freddie Mac's chief economist.

Rising mortgage rates can house financial peril

ortgage rates last week hit their highest point since September 2003, which means homebuyers should brace for higher monthly payments. On the other hand, rising rates may be a breath of fresh income to retirees relying on interest payments.

That's the Jekyll-and-Hyde effect of rising rates since the Federal Reserve began raising them in quarter-point bumps a year and a half ago. This month's federal funds rate increase to 4 percent was the 12th in a row -- and more are probably on the way, the Fed warns.

This week and next, we'll look at the opportunities and traps rising rates present for home borrowers and savers.

Until recently, mortgage rates, which track 10-year government bonds, haven't taken the same upward trajectory as short-term interest rates controlled by the Fed. It looks as if long-term rates are now ready to play catch-up and could squeeze borrowers who've been relying on market appreciation rather than principal payments to build home equity. So far in Portland's real estate market, where double-digit annual appreciation has been the norm, that's been a good bet.

But people who've stretched to buy a house by coupling no-down-payment loans with interest-only monthly payments could be in for a shock when Portland-area real estate eventually cools. It won't take a total collapse in real estate prices, just a decline in the growth of appreciation, to put some homeowners in one heck of a bind.

Ken Minn, loan officer at Portland's First Horizon Home Loans, explains how. A borrower with a $200,000 zero-down, interest-only loan has a house payment that is about $200 lower per month than if he were paying principal, too. The lower payment qualified him to borrow more than if he were paying principal.

If real estate prices increase 20 percent, and he sells next year, he pockets $40,000, minus sales costs of $16,800.

"But if values start tanking and you're not paying down principal, you can get hurt," Minn says. "If the value drops, say, to $190,000, now you're in a negative equity situation. If you have to sell, you have to come up with $10,000 at closing plus 6 to 7 percent in commission and closing costs."

What if you have to stay in a home you thought you'd sell? If you paid 5.75 percent interest -- but no principal -- for the first five years, your payment on $200,000 would start at $1,167, but jump to $1,258 in the sixth year when the principal kicks in. If your interest-only loan is adjustable, the new rate after five years could be much higher. At 7.5 percent, your payment would be $1,478.

"That's the concern out there," Minn says. Although half his clients still choose the safety net of a fixed-rate, principal-and-interest loan, "a good 30 percent of my borrowers are opting for interest-only loans." Most of them are putting 10 percent to 20 percent down, though, so they have some equity as a cushion.

"In Portland, the probability of the market tanking is pretty slim," he says. Nevertheless, borrowers who already have or are considering zero-down loans with interest-only options should know the dangers. If they haven't already, borrowers should talk to their lenders about worst-case scenarios -- and plan for them.

The most important question to answer about any mortgage, Minn says, is how long you intend to have it. If you'll be in your home for more than seven years, a fixed-rate 30-year or 15-year mortgage is still the best deal for most people, because they'll be locking in a relatively low rate and building equity over time. The average rate nationally on a 30-year fixed loan last week was 6.36 percent; the average for a 15-year mortgage, 5.89 percent.

"Rates are up slightly, yes," says Mark Haldeman of Wells Fargo Home Mortgage in Portland. "But they're still quite attractive." Even if the 30-year fixed rate goes to 6.5 or 7 percent next year, he said, "historically, that's not too bad."

If you'll be in your house for less than seven years, the ideal mortgage could be a five-year or seven-year hybrid adjustable. The hybrid, which fixes interest for the first five or seven years and adjusts annually after that, is the most popular mortgage in the Portland market because it's relatively safe and it's cheaper.

Big Builder Sees Slower Home Sales

The nation's largest maker of luxury homes, Toll Brothers, said yesterday that soaring home prices appeared to have ended. It was the latest sign that many real estate markets are slowing.

Although the company said it expected to report a record profit for the last 12 months, it predicted that it would sell fewer homes over the next year than it had forecast and would make less money than previously anticipated. High gas prices and the recent hurricanes seem to have rattled consumers, causing some to delay purchases of houses, company executives said. Also, some local governments appear to be holding back on construction permits, to slow new building.

Shares of Toll Brothers fell after yesterday's announcement and ended the day down 14 percent, at $33.91. The news dragged the shares of other home builders lower, and the Bloomberg United States home builders index fell 7 percent yesterday.

"The price increases pre-Katrina were at warp speed, and since Katrina, instead of going up $5,000 or $10,000 every week or two, we have been limited to no price increases or very limited price increases," Robert I. Toll, the company's chief executive, said in a conference call yesterday. The number of investors buying condominiums and houses in the hope of turning a quick profit also seems to have plunged, he said in an interview last week. "The true speculator is gone from the market," Mr. Toll said.

Certain markets appear to be losing steam faster than others, Mr. Toll said. Washington, Chicago and Northern California were slowing from high levels of activity, while Boston, Denver and the west coast of Florida were still hot markets for the company. Las Vegas, which has experienced a huge condo building boom, slowed down "ever so slightly" in July and appears to be staying at that level, he added.

The company, whose homes sell at an average price of $679,000 and whose typical buyer has an annual family income of more than $100,000, emphasized that it still expected a happy ending for the long housing boom.

Home prices, the company said, are expected to continue rising, but at historical averages and not at the rapid rates that they have recently in the Northeast and California. Since 1964, new-home prices have risen an average of 6 percent a year, according to the Commerce Department. Last year, they rose 13 percent.

Even with its reduced forecast, Toll Brothers expects to sell 7 percent more homes in its current fiscal year, which began Nov. 1, than it did in the previous year. Last year, the company's revenue rose 50 percent, to $5.8 billion, according to preliminary figures released yesterday. The company will disclose detailed financial results and projections for 2006 on Dec. 8.

In many of the nation's hottest real estate markets, houses are taking much longer to sell than they once did, and some agents are talking about a slowdown in attendance at open houses. In September, there was a 4.7-month supply of already- built homes on the market, up from 4.2 months a year ago, according to the National Association of Realtors.

Mr. Toll said last week that in some markets, the company was starting to offer incentives like a luxury kitchen at no extra cost to the buyer.

J. Patrick Lashinsky, a senior vice president at ZipRealty, a brokerage firm with offices in 15 metropolitan areas, said, "In a lot of our markets, we're seeing inventory levels up 20, 30, 40 percent from a few months ago." Some of the biggest increases were in the Phoenix, San Diego and San Francisco areas, he said, and the number of houses for sale had also risen in Atlanta, Boston and Chicago.

For the moment, at least, prices have stopped their steep climb, with some owners reducing asking prices to attract buyers. Average sale prices traditionally drop in autumn, because home purchases slow then, but the decline appears to have been steeper than usual this year.

Between August and September, the median sales price of already-built homes dropped 3.6 percent nationwide, to $212,000. During the same period last year, prices fell 1.6 percent, according to the National Association of Realtors.

The median sales price for new homes fell 5.7 percent, to $215,700, from August to September, according to the Commerce Department. That compares with a 3 percent drop a year ago.

Richard A. Smith, chairman and chief executive of Cendant's real estate business, said he, too, expected a slowing in the housing market next year, but that 2006 would still be one of the strongest years on record for home sales. "The problem with forecasting this time of the year is, if you look at the seasonality of the business, this is always the slowest time of the year," Mr. Smith said.

The slowdown appears to be linked to a steady rise in mortgage rates in recent months. The average rate on 30-year fixed mortgages was 6.31 percent last week, up from 6.15 percent the week before and 5.77 at the start of the year, according to Freddie Mac. Even with the increases, the rates are still below historical averages.

Loan applications for purchases and refinancing fell 4.8 percent in the last week of October and were 15.2 percent lower than the same week last year, the Mortgage Bankers Association said. Loans for purchases fell 6.2 percent for the week and 11.9 percent from a year ago.

Some economists argue that the recent softening might be the beginning of a more severe downturn. Neither income nor population has grown quickly enough to justify the doubling of prices in some areas since 2000, these economists say. They add that rents have risen much less than home prices.

"There is a large psychological element behind current housing prices," said Dean Baker, co-director of the Center for Economic Policy Research in Washington. "People are willing to pay them because there is an expectation that prices will continue to rise. Once people don't have that expectation, things will change."

Even many analysts who are not so pessimistic say the recent increases cannot continue.

"Home prices have been growing so fast for so long, outstripping income growth for many years," said Gene Huang, the chief economist of FedEx, who keeps an eye on home prices as an overall gauge of the economy's health. "Some kind of adjustment has to happen."

Per capita disposable income grew 3.6 percent over the last year, according to the Commerce Department.

More than four out of five economic forecasters surveyed by Blue Chip Economic Indicators said they expected existing-home price growth to slow to 5 percent by the end of 2006, from 13 percent over the last 12 months.

"All of a sudden, the ads in the paper show special mortgage deals, special incentives," Mr. Toll said last week, referring to new housing developments nationally. "That's an absolute indicator that the market has softened."

Mr. Toll also attributed his company's new sales forecast to toughening local regulations, saying governments in many cities were delaying new projects to placate existing residents who want slower growth.

"We are building in pretty well-established territory which means it's also pretty well regulated," he said on the conference call. "We have a heavier-hitting average population, and their desire is 'Not in my backyard, please slow it down.' "

New Conforming Loan Limits

New Conforming Loan Limits

Property Type 48 States Alaska & Hawaii
1-Unit $400,000 $600,000
2-Unit $512,000 $768,000
3-Unit $618,900 $928,350
4-Unit $769,100 $1,153,650

'Biggest bubble in history' may burst

Investors need to be on guard, because there is currently a large bubble in the United States property market and if it bursts, it could have repercussions for the global economy, Michael Power, a strategist at Investec Asset Management, told the Personal Finance/Fairbairn Capital Investors' Club this week.

A bubble in the United States residential property market is in danger of bursting, and declines in the US's biggest housing markets are likely to trigger a major economic slowdown, Michael Power says.

US house prices have risen by an average of 13.4 percent over the year to the end of the second quarter of 2005, and in some areas prices have risen by more than 25 percent over the past year, Power says. Las Vegas currently has the hottest property market in the US and prices there are up 33 percent on a year ago.

The value of new and existing home sales has increased by 280 percent in eight years.

Power says the dot.com bubble of 2000 morphed into a real estate bubble, because despite the Wall Street crash that year, house prices did not skip a beat and have in fact increased at a faster rate.

House prices have increased, mainly because the real cost of borrowing has remained low, Power says.

However, prices have also been driven up by politically expedient tax cuts, the 1997 relaxation of capital gains tax on property sales and "a slew of creative financing schemes", which have made it easier for buyers with very little equity to enter the house market.

Home loan or mortgage companies are offering loans equal to 125 percent of the value of the property, and mortgages are being extended to Americans with bad credit records, he says.

In addition, some companies are offering fixed-rate loans, which, when interest rates rise, will result in the difference between the repayments and the higher interest rates being capitalised and added to the value of the loan.

Power says an indication of how hot property is in the US, is the fact that more than 40 percent of the properties traded are bought and sold before they have been built. When owners move into a new property, they may be the first occupants, but the fourth owner, he says.

Alan Greenspan, the chairman of the US Federal Reserve, is in denial about a national house price bubble, Power says, referring only to "signs of froth in some local markets where home prices seem to have risen to unsustainable levels" and "a lot of local bubbles".

Higher prices fuel spending
The increased property prices have in turn been used to fuel consumer spending. Power says Americans have been treating their homes like ATMs. In 2004, they withdrew $700 billion from their mortgages to spend on things such as holidays and imported goods.

Owners' equity in real estate - or the portion of Americans' homes that is not mortgaged - has declined over the past 20 years from a high of 70 percent to a low of about 55 percent. Over the same period, home mortgage debt as a percentage of gross domestic product (GDP) has increased dramatically from just over 30 percent 20 years ago to more than 60 percent at the end of last year.

The reduction in US home equity last year was equal to seven percent of the country's GDP, Power says.

Power says that instead of taking away the punch that American consumers were drinking, Greenspan spiked it with negative real interest rates, thereby fuelling the spending spree. Americans have been drinking to keep away the hangover ever since, he says.

The Economist magazine has described the situation in property markets in developed countries as "the biggest bubble in history". Power says The Economist has reported that the total value of residential property in developed economies has risen by more than US$30 trillion over the past five years to over US$70 trillion, an increase equivalent to 100 percent of those countries' combined GDPs.

The bubble, The Economist says, "is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80 percent in GDP) or the US's stockmarket bubble in the late 1920s (55 percent of GDP). In other words, it looks like the biggest bubble in history."

Rate hikes have little effect Power says that despite recent interest rate increases in the US, long-term interest rates and therefore mortgage rates, have stayed low, because central banks in Asia, and particularly in China, have been investing their surplus dollars in the US bond market, thereby subsidising US mortgage rates. (Mortgage rates depend on long-term borrowing rates such as bond rates.)

Asian countries have earned these surpluses from US consumers' spending on Asian imports.

But, Power says, this cycle can be likened to a hamster on a wheel and eventually the hamster - either China or the US consumer - will get too tired to run.

The US, he says, is running up the largest bar bill in history. "For how long will the China Country Club fund this tab?"

How this affects you
The global train depends on the US consumer being the locomotive. If there is a slowdown in spending, he says, it will be bad for all of us.

Power says in his view the first signs of distress in the US property market have already appeared, with investors in the market feeling uneasy. Affordability has decreased markedly in the past two years and first-time buyers are finding it increasingly hard to enter the housing market.

On average, mortgage repayments as a percentage of income has risen to 20 percent, which, Power says, is still manageable, but one in three Americans spends 33 percent of his or her income on his or her mortgage repayments, and one in 10 spends more than 50 percent. As US interest rates rise, these people will have little room to manoeuvre and will be forced to sell or will default on their loans.

More and more borrowers with "impaired credit records" have been lent money to buy homes and their loans now represent 17 percent of all home lending in the US, Power says.

About 18 percent of US home loans are for more than 90 percent of the value of the property.

The after-shock of the increase in interest rates in the US will only be felt next year, Power says, and borrowers with impaired records will be the hardest hit.

Household debt in the US now exceeds US$10 trillion and has in-creased from 45 percent of the US's GDP 20 years ago to more than 85 percent today.

And more than 75 percent of that debt is housing-related, Power says.

At the same time, more properties are still being built.

Signs of distress
Signs of distress include the fact that the share prices of companies which provide mortgages to Americans, such as Fannie Mae, are 34 percent down over the past 12 months.

And the housebuilders' index has fallen 17 percent in three months, he says.

Power says there are some arguments as to why property in the US may not be overvalued. These arguments are:

# The US population has grown and this has resulted in an increase in demand for housing;
# People are living longer and this has also resulted in more people needing homes;
# People are getting married later, resulting in more single people needing homes and there are also more single-parent families;
# Rising standards of living have lead to demands for bigger and better homes;
# New financing techniques have put trapped capital to work; and
# There has been a decline in inflation, which has lowered financing costs and the risks of lending.

However, Power says the risks of lending have turned negative and could ultimately affect the US market.

Widespread effects
The effects will be more widespread than just the property market.

Power says more than 50 percent of the US's banking assets are exposed to property. There will also be job losses as at least 50 percent of new jobs that have been created since 2000 are housing-related, he says.

Power says property market crashes often last longer than equity market crashes. The Japanese property bear market is now 15 years old and it took seven years before property prices in the United Kingdom recovered from the 1989 crash there. If history is a guide, Power says, property prices can halve in four years.

But if the US property market crashes, it won't be just property investors who suffer.

"Over the past four years, 90 percent of the growth in US GDP was accounted for by consumer spending and residential construction. De-clines in the nation's biggest housing markets are likely to trigger a major economic slowdown," the Orange County Register newspaper in California says.

"It is not a question of whether this will happen but when, how dire will be the consequences on economic growth and how long it will take to re-stack the blocks and begin again."