Even Once-Strong Housing Markets Stumble

by Prashant Gopal
Friday, January 30, 2009 provided by

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Formerly resilient areas like Charlotte, N.C., and Boston are struggling, according to the latest S&P/Case-Shiller Home Price Index

Home prices in 20 major metro areas nationwide fell 18.2% in November -- a record annual pace -- as the deteriorating economy pulled down previously resilient markets, according to the S&P/Case-Shiller Home Price Index released Jan. 27.

All 20 metro areas in the index saw annual price declines, 14 of which were double-digit drops and 11 of which fell by record rates. Only Denver and Dallas experienced a drop of less than 5%.

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The index, which is a three-month moving average ending in November, captures the impact of the financial crisis following Lehman Brothers' collapse in September. The November decline was terrible, but it wasn't much worse than the October drop, said Patrick Newport, U.S. Economist for HIS Global Insight.

"There is so much inventory," Newport said. "Prices are going to continue to drop for quite a while."

Bargains in Worst Markets

But in the worst markets, including Miami, Phoenix, Los Angeles, San Diego, and Las Vegas, the year-over-year price declines -- though deep -- have remained relatively flat since the summer. A wave of foreclosures has depressed prices so much in those markets that investors and other first-time home buyers have moved in to scoop up bargains. According to a survey released on Jan. 26 by the National Association of Realtors, sales of existing single-family homes jumped an unexpected 7% in December from November's seasonally adjusted annual rate.

In Los Angeles, for example, the annual decline has stayed between 25% and 27% since June, according to the index. In Miami, the annual declines since may have remained in the 28%-to-29% range.

"If you buy a home and rent it out in these markets, you can have a positive cash flow just because prices are so low," said Mike Larson, a real estate analyst with Weiss Research in Jupiter, Fla. "Even though the economy is crummy, some investors are willing to nibble when the price is right."

Other resilient markets were feeling the impact of the economic downturn. Year-over-year declines have been accelerating in Minneapolis, Boston, Chicago, Seattle, Atlanta, Washington, Detroit, San Francisco, and Charlotte, N.C.

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Charlotte Market Stumbles on Banking Woes

In Atlanta, for example, the year-over-year declines increased steadily each month, from 2.12% in November 2007 to 11.25% in November 2008, according to the 20-city index. In Charlotte, the banking capital of the South, home prices fell 5.33% in November 2008. By comparison, prices jumped 2.9% in November 2007.

The Charlotte housing market was relatively stable until the summer because the area had benefited from a population boom and a strong job market. But buyers grew cautious as problems worsened in the financial sector. Charlotte-based Bank of America plans to eliminate up to 42,500 jobs worldwide as a result of mergers with Countrywide Financial and Merrill Lynch. And Wells Fargo also is expected to cut local jobs as a result of its acquisition of Charlotte-based Wachovia.

"People don't know how many layoffs there will be in Charlotte," said Professor Steven Ott, director of the Center for Real Estate, University of North Carolina at Charlotte. "There's a lot of uncertainty."

Charlotte appraiser Steven Stone said Charlotte's problems have worsened since November. Home sales were off 40% in December compared to the previous December. And prices are now down 15% to 20% for homes above $600,000 and down up to 20% for starter homes, he said.

The financial crisis is the "main reason Charlotte took the last punch compared with other markets," Stone said.

Gopal writes about real estate for BusinessWeek in New York.

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