Sunday, November 07, 2004

Signs market is slowing

From The Morning Call

Signs market is slowing
By Beth W. Orenstein
Special to The Morning Call

November 7, 2004

The average sale price for a home in the Lehigh Valley in July was a record: $202,000.

July was an incredibly strong month for home sales, says James Laudone, president of the Lehigh Valley Association of Realtors. ''The numbers were literally off the chart.''

August and September were strong as well. The quarter ended with 2,435 sales at an average sale price of $198,670.

That's nearly a 12 percent increase in sales and 22 percent in price over the past two years. The third quarter of 2002 saw 2,143 sales at an average sale price of $155,000.

However, Laudone believes that the boom may be coming to an end and that over the next two to three years sales will slow and prices will decline.

''Prices are going to come down,'' he says.

Laudone's reason for predicting a slowdown: The real estate market runs in cycles of hot and cool. As prices rise beyond the reach of some buyers, sales fall, both in numbers of sales and average sale price.

Price increases of 1 to 2 percent a year are normal, increases of 20 to 30 percent are not, explains Laudone, information technology director for Patt White GMAC Real Estate in the Lehigh Valley.

''We just saw a decade's worth of price increases in a two-year time span,'' he says. ''Prices have to correct themselves in the next 24 to 36 months. The housing market is no different from the stock market. When you see huge swings up, the market tends to correct itself and keep itself in balance.''

Laudone expects a repeat of the late '80s, early '90s, when prices quickly climbed about 30 percent and then tumbled below where they had started. The problem was the stock market crashed and people didn't have the money to invest in real estate.

Many people who bought homes in the late '80s lost money if they had to sell them a year or two later, Laudone says. ''I see the same thing happening.''

There are signs the market is already beginning to slow, Laudone says. ''I think the influx of buyers has already started to soften.''

For the past several years, the Lehigh Valley market has been buoyed by buyers coming from New York, New Jersey and Bucks and Montgomery counties because they could buy larger homes on larger lots for less money.

The problem, Laudone says, is that it's becoming ''just as expensive to live here as it is there.''

Average sale prices in the Lehigh Valley have started to decrease, Laudone says. ''July was an all-time high. Prices were down a little in August and a little more in September.'' The average price went from $202,000 in July to $198,000 in August to $196,000 in September.

Laudone expects of new construction will drop once the builders sell those they have under contract. ''Once the builders have built all the houses they have on order, I think you'll see the same on the new-construction end,'' he says.

The average sale price of a newly constructed four-bedroom, 21/2 bath house was $310,000 in July, $315,000 in August, and $394,000 in September, according to the LVAR's Market Update.

The local scene for new homes mirrors what's being seen nationwide.

National Association of Home Builders Chief Economist David Seiders says the nation's housing market is in the process of ''reaching its limits'' and ''topping out.''

Seiders is forecasting a decline in sales of new single-family homes, which are forecast to drop 5.2 percent from a record of more than 1.16 million this year to about 1.1 million.

Still, Seiders says, the fundamentals of the market should remain strong in 2005.

Some households may have moved up their home-buying plans from next year to this year when they saw mortgage interest rates starting to rise. However, the formation of new households and immigration should continue to fuel demand, he says.

Bethlehem economist Kamran Afshar agrees that with mortgage rates poised to increase and slow economic growth, area home prices could be headed for a fall. ''Obviously there is that bad precedent and the similarities are mind- boggling,'' he says.

Fortunately, Afshar says, while markets are cyclical, no two events are exactly alike, and so a repeat of the late '80s, early '90s isn't as likely as it might seem.

Afshar agrees prices could not continue to increase as rapidly as they have in the past few years.

''It's very hard to imagine rates going up another 20 to 30 percent in the coming year,'' he says. He's already seeing the market losing some steam.

The most likely scenario is for prices to stabilize, he says. It's more typical for the market to go sideways — no big increases or declines — after a run like it has just had. Afshar can see the market giving up some of its recent gains, but certainly not all of them.

Other area Realtor association presidents are mildly optimistic about the next few years.

Barbara Samet, who became president of the Pocono Mountains Association of Realtors in October, says the market is ready for a correction. However, she says, ''it's not going to be nearly as dramatic as it was the last time.''

Demographics should keep prices from falling, she believes. The Poconos is still a very desirable area for families wanting to escape New York and New Jersey prices and city life, she says. ''The number of people wanting to move to our area is going to keep our market fairly stable,'' she says.

Indeed, she says, newcomers are finding they have to go further west and commute longer to jobs in the city to be able to buy a home in the Poconos. ''The closer you are to Intestate 80 and the closer to University and Medical Center, the less inventory we have and the more the home costs,'' she says.

During the third quarter, the Pocono Mountains Association of Realtors reported 1,044 sales, an increase of 6 percent over the 989 sales in the same period the previous year. Prices were up 4 percent from $156,655 to $163,670. Time on the market also decreased during the third quarter from 138 days in '03 to 109 days this year.

Gail Christman, president of the Carbon County Association of Realtors, doesn't believe the market can continue to climb as it has for much longer. But she doesn't see ''a big crash of any type'' either.

Prices may even continue to rise, she says, if inventory remains tight.

If people are afraid they won't get as much for their homes as they would have a few months ago, they might hold on to them.

''That will reduce inventory and keep prices up,'' she says. ''Prices will remain close to what they are now if there remains as much demand as there is supply.''

Christman says the third quarter was extremely active in Carbon County. Its members reported 127 sales at an average price of $101,365. That's a 20 percent increase in sales from the third quarter of last year when members reported 105 sales.

However, prices were down slightly — about 4 percent. The average sale price for the third quarter of 2003 was $105,332.

Anne Standing, president of the Montgomery County Association of Realtors, sees prices stabilizing, not declining and certainly not dramatically.

''I've heard of a few instances recently where an offer on a home was less than the owners paid for it two or three years ago. But they bought it in a multiple bidding situation and probably paid more than asking for it'' she says.

''I really don't think you're going to see a correction as big as you saw in the late '80s,'' she says. ''You may see a slight reduction but I don't think it's going to be that significant. I certainly don't see gloom and doom.''

Something major has to happen for home prices to drop dramatically — ''like the whole economy going to hell in a hand basket,'' Standing says, ''and I don't think that's likely.''

Historically low interest rates on 30-year home loans helped feed the boom in home sales over the last few years. Standing believes even if rates increase slightly, it won't be enough to put a damper on home buying. ''Interest rates were 53/4 again in October. That's fantastic,'' she says.

Also, she says, people continue to view real estate as a safe and profitable investment.

Standing says any slowdown her members saw in the third quarter was typical for the summer months when people are busy with vacations and other things.

In Montgomery County, the average sale price for the third quarter was $317,195, up more than 16 percent from $272,827 the previous year. That's based on sales of 3,492 and 3,330 respectively.

In Bucks County, the average sale price for the third quarter was $335,812, up 19 percent from $282,449, the previous year. Sales jumped from 2,464 in '03 to 2,590 — an increase of 5 percent.

Beth W. Orenstein is a freelance writer.

Real Estate Editor Eloise DeHaan

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