Housing market cools ... along with weather

Martin Wolk Chief economics correspondent • Profile • E-mail

Phoenix real estate executive Rich Rector has been seeing something unusual lately as he makes his rounds: “Open House” signs.

A few months ago the market around Arizona’s biggest city was so hot that homes sometimes sold “within a matter of minutes” after they were listed, Rector said. There was rarely any need for real estate agents to drum up business as they typically do in most places -- by sitting in an empty house and waiting for would-be buyers to walk in off the street.

Now the Phoenix market has cooled substantially, and there are signs the housing boom is fading in many parts of the country. The question is whether the slowdown is the beginning of a potentially damaging decline in sales activity and prices predicted by some experts, or whether the market will regain momentum again in the spring as it often does.

Disappointing sales figures published in late October, coupled with a steady rise in mortgage interest rates, sparked a flurry of articles suggesting that the long-awaited housing bust had arrived.

A story in USA Today, for example, referred to “nervous chatter” about increased inventory available for sale, and anecdotes about sellers cutting their asking price.

And to be sure, even many housing industry experts believe 2005 will end up being the peak year of the long, strong housing cycle that has a dependable engine of economic growth.

“I do think we are either at a plateau, a crest or whatever you want to call it,” said Frank Nothaft, chief economist at mortgage giant Freddie Mac. “It will clearly turn out to be a record year for home sales and single-family construction. …. As mortgage rates go higher, that will work to reduce housing demand.”

But it might be a bit early to leap to the conclusion that housing prices are about to crater.

Mike Englund, chief economist for Action Economics, points out that the housing market tends to go into a seasonal slowdown every year at this time. Spring is a far more popular time to buy a home, especially for families with children who may have to switch schools, so the strongest demand and price gains typically are seen in the second quarter.

And even though some housing data are adjusted for the expected seasonal variations, the “clustering” of high demand in the spring and excess supply in the fall appears to be getting more pronounced, Englund said.

Looking at sales of existing homes from 1968-2005, the median sales price typically has risen 15 percent in the second quarter, risen 8 percent in the third quarter and then fallen 5 percent in the fourth quarter. But over the past decade the median has risen 18 percent in the second quarter, 11 percent in the third quarter and then fallen 6 percent in the fourth quarter.

This year prices rose 49 percent in the second quarter and 16 percent in the third quarter, so even a sharp drop in the final two months of the year would not be surprising, Englund said.

“Virtually everyone you talk to in the market thinks we’re seeing a pullback in the market, and clearly we are seeing a seasonal pullback,” Englund said. “What we’re arguing is it’s not clear this bubble period is over because this pullback in the fourth-quarter happens every year.”

The true state of the housing market will not become evident until the spring, when seasonal demand will peak and savvy sellers who can hold out will try to get the highest possible prices.

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