Hidden drop in house prices

The Baltimore Sun

Samantha Stoney bought her house in Canton for a lot less than the sellers had originally hoped to get, but the good deal didn't end with the $243,000 price. They covered most of her closing costs, too - a $10,000 incentive.

In effect, the sellers received $233,000. But that's not what got recorded in the home sales statistics.

Amid a deepening housing slump, givebacks have become increasingly common, even expected as a matter of course here and nationwide, economists and real estate agents say. And because they're unmeasured, they mask an erosion in housing prices.

These discounts are so widespread that some economists think that prices in the Baltimore area - up about 2 percent so far this year, according to official numbers - have really declined.

"They've probably been falling since late last year or early this year," said Mark Zandi, chief economist at Moody's Economy.com.

That's good news for buyers. Local real estate agents say homeowner givebacks are typically worth 2 percent to 5 percent of the home's selling price - significant cash. Five percent of a $400,000 home is $20,000. Some homebuilders, meanwhile, are advertising incentives of up to $100,000.

And it doesn't look as if sellers will be able to stop soon. All signs show that the market is getting worse at a time when economists had originally expected to see a bottoming-out. Now some economists think that a recovery - here and nationally - won't take hold until 2009.

U.S. home sales last month dropped to a five-year low, while the time it would take to sell the unsold homes at the current pace was the highest in 18 years, the National Association of Realtors said. Those are primarily resales, but new homes also took a dive. The average price of a new home fell 8 percent - the biggest drop in 17 years - as sales hit seven-year lows, according to government estimates.

Dismal as the numbers were, the market could deteriorate further as the full impact of the subprime mortgage mess takes hold, economists say.

In the Baltimore metro area, the number of unsold homes on the multiple listing service hit its highest level on record last month, just over 20,000. Metropolitan Regional Information Systems Inc., which runs the service, has numbers back to March 1999.

Sales were down 17 percent from last August - and nearly 40 percent from August 2005, the end of the housing boom. Price gains have shrunk drastically, too, from an average of almost 20 percent in 2005 to essentially zero last month.

Zandi expects that home prices in the Baltimore area will decline over the next year to year and a half, at about the same pace as the nation overall. Add incentives, and the drop in values will be even greater than reported.

"I think when it's all said and done, the measured home price will have declined by about 10 percent," he said. "But the effective price after the discounts will be closer to 15 percent."

Some parts of the nation will have it much worse, he said, particularly areas that boomed even more than Baltimore. The S&P;/Case-Shiller index, which tracks repeat sales of single-family homes, found that values in July had already dropped nearly 9 percent in Tampa, about 8 percent in San Diego and 7 percent in Phoenix from a year earlier.

And that doesn't include the freebies, which are even bigger in the most distressed markets.

"It's quite amazing, the extent of incentives in other parts of the country," said Kenneth Wenhold, the Maryland and Virginia director for Metrostudy, a real estate advisory firm that tracks residential housing trends. In Las Vegas, he said, desperate builders are saying: "You buy our house, and we'll make sure there are two cars sitting in the garage for you."

It's a reversal from the boom times, when buyers were the ones making all the concessions. They offered contracts with escalation clauses, waived home inspections and super-sized their earnest money, all to compete in a market in which homes sold within days.

Now, two years past the peak, unsold homes in the Baltimore area have nearly tripled, and sellers are often finding they have to fork out sweeteners if they want buyers to bite.

"I didn't get any calls until I offered the closing [help]," said Tony A. Dean, 38, a Baltimore resident who's moving to Florida and expects to go to settlement on his city home next month. "Everyone is offering incentives."

Cindy Ciresi, a Realtor with Long & Foster in Hunt Valley, said she's hoping that a year's worth of prepaid condo fees will differentiate a client's home in Reisterstown from the 15 nearly identical ones for sale in the neighborhood. "There's so much out there - you have to be competitive."

That sort of market positioning mattered to Stoney, a community planner who visited at least 17 properties before settling on a newly rehabbed Canton rowhouse last month. The price reduction was nice - originally listed at $300,000, it had already been lowered by the time she was looking - but the $10,000 toward closing costs "really made a big difference," she said. It added up to 4 percent of the contract price.

Lara Faulkner of City Life Realty, her agent, said most of the transactions she's handled this year have included a "seller contribution."

"I didn't have to negotiate anything," said Stoney, 25. "I probably wouldn't even have asked for quite that much."

Ryland Homes, which has a dozen new-home projects in the Baltimore metro area and on the Eastern Shore, is frequently paying all closing costs - about 6 percent of the sales price. Another common incentive is a finished lower level at no charge.

At Ovation, a luxury condo project in Columbia, Ryland is covering a year's worth of pricey condo fees. To bring attention to its Church Hill Hunt community in Queen Anne's County, it promises buyers help in selling their current homes.

"The people making money in real estate today are not the ones selling it; they're the ones buying it," said Earl Robinson, vice president of sales and marketing with Ryland, who estimated the value of the company's incentives at "upwards of $100,000" in some communities.

"But I would also say I'm finding things stabilizing and bottoming out," he added. "I don't expect there to be more incentives next month than there are this month, and for a while there, that's what I was seeing."

The most widely offered incentives for new homes are free upgrades - which cost builders less than the market value - and closing-cost help, the National Association of Home Builders says. Just over 55 percent of homebuilders surveyed last month were giving buyers optional items at no charge. About 45 percent were paying all or some closing costs.

That's more than at the end of 1990, a recessionary year and an especially challenging time for builders. Then, 50 percent of builders were offering free upgrades and about 35 percent were paying closing costs.

Stephen Melman, director of economic services for the homebuilders' association, said builders need to try something when sales are falling. "It doesn't work 100 percent of the time," he said. "That's the problem."

In the Baltimore metro area, sales of new homes from January through July dropped 20 percent compared with the same period last year, according to Hanley Wood Market Intelligence, which tracks the industry.

Even so, the number of homes either under construction or finished and unsold is still within the normal range - indicating one of the tightest markets of the 90 metro areas Metrostudy tracks, Wenhold said.

Builders are offering incentives, he said, to compete against all the older homes for sale and to grab a bigger piece of the new-home market while the grabbing's good.

"What they're basically doing is slitting the other builders' throats in an attempt to capture market share," Wenhold said.


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