`For Sale' Signs Rise, Home Sellers Cut Prices as Fed Tightens
2006-03-31 00:09 (New York)

By Matthew Benjamin and Kathleen M. Howley
March 31 (Bloomberg) -- Maryam Safai's 5,000-square-foot, five-bedroom colonial in Mahwah, New Jersey, has been on the market for a year, even after three reductions in asking price.
``I'm not going to give in to the market,'' says Safai, 44, a dentist. ``I'm not selling below our current asking price'' of $1.69 million.
Like Safai's northern New Jersey neighborhood, housing markets around the nation are cooling, mostly as the result of
the Federal Reserve's drive to push up interest rates. That has slowed price increases in most of the country and reduced demand for risky types of financing that caused former Fed Chairman Alan Greenspan to worry about ``froth'' in the housing market.
Sales of new homes fell 10.5 percent in February, the biggest drop since 1995, and sales of existing homes slipped in five of the last six months, leaving a record 3 million unsold houses on the market. Sales will fall further this year and price gains will slow, predicts the Washington-based National
Association of Realtors. High-end properties and markets that had the biggest increases during the boom are cooling the most.
``The markets that were the high flyers over the past couple of years have more adjusting to do,'' says Jeff Lyons, general
manager of RealEstate.com, a consulting firm in Charlotte, North Carolina. ``Entry-level buyers are still strong, while buyers looking to step up to bigger houses are becoming more cautious.''

Signs Abound

Signs of the cooling market aren't hard to find on Bradford Street in Boston's South End, where Victorian townhouses are listed for as much as $4.5 million.
``Last year, houses were snapped up as soon as they were put on the market, so you never even saw a sign,'' says Kenneth
Kinna, 41, a film producer who owns a 10-room townhouse in the neighborhood. Now there are three ``For Sale'' signs on his
block.
The trend is most pronounced in affluent neighborhoods in the Northeast, where prices soared the most during the real-estate boom. Median prices for existing homes in the northeast were up 5.2 percent in February from a year earlier, compared with almost 18 percent in the previous 12-month period, according to the Realtors group.
Price growth slowed to about 4 percent in the Midwest in February, down from 7.7 percent the previous year. Growth in the
West has remained in the 12 to 14 percent range, with New Mexico and Arizona gaining while the California market slows. Prices
increased in the South, to nearly 12 percent in February, from 6.5 percent the year before.
The Fed, which last May warned that easier credit was fueling home price speculation, has since increased short-term interest rates seven times, most recently on March 28.

Monthly Payments

Buyers of houses in the $1 million to $4 million range are ``particularly sensitive to interest rates because the monthly payments on houses in that range are substantial,'' says Anthony Hsieh, chief executive officer of LendingTree.com, a mortgage-provider Web site based in Charlotte, North Carolina.
While damping price growth the most at the high end of the market and in the Northeast, rising rates have also reduced
demand for riskier forms of financing and begun a shift of power from sellers back to buyers, economists and brokers say.
In a sign that buyers are starting to gain the upper hand, pre-sale home inspections are back in vogue in Montgomery County, Maryland, says Meg Finn, a Long & Foster agent based in Bethesda. Just a year ago, buyers who insisted on inspections jeopardized
their chances of getting a house in a bidding war, she says.

Unsold Homes

In Montgomery County, which includes the affluent Washington suburbs of Bethesda and Potomac, unsold homes were on the market
an average 58 days in February, compared with 37 days a year earlier, according to Metropolitan Regional Information Systems
Inc. The 3,030 homes for sale in the county in February were almost triple the 1,190 listed a year earlier.
Economists still expect 2006 to be a strong year for housing. David Berson, chief economist at Washington-based Fannie
Mae, the nation's largest buyer of mortgages, expects sales of existing houses to fall 9.2 percent to 6.4 million, and new home
sales to fall 7.4 percent to 1.19 million. Sales in both categories would be the third-best on record.
``The greatest proportion of the decline in home sales we're looking at this year will come from investors,'' he says.

Source of `Froth'

That will remove one source of the ``froth'' in the housing market of which Greenspan warned. Partly as a result of the Fed's 15 consecutive increases in interest rates, adjustable-rate and interest-only loans, closely tied to short-term rates, are on the
decline. Such loans were popular with buyers trying to stretch their dollars and with speculators seeking to minimize the cost
of buying property for short-term profit.
``That's probably a good thing,'' says former Fed Governor Edward Gramlich, who left the Fed in August. ``When you raise
rates, and we knew what we were doing, one of the consequences is fewer people getting involved in riskier short-term mortgage
products,'' says Gramlich, now interim provost at the University of Michigan in Ann Arbor.
In Medford, Massachusetts, newlyweds Amy Stewart and Jason Walker chose a traditional 30-year fixed-rate mortgage for their first home after flirting with the idea of an adjustable-rate loan with a lower initial payment.
``We thought about an ARM, but the rates are so close we opted for the security of a 30-year fixed,'' says Stewart, 29, a lawyer in Boston.

ARMs Reduction

Adjustable-rate mortgages represented less than 30 percent of all loan applications in January, down from an average 36 percent during all of 2005, according to Fannie Mae, the largest U.S. mortgage buyer. Interest-only loans accounted for 22 percent of all adjustable-rate mortgages in 2004, more than double the share the previous year, according to Freddie Mac, the No. 2 mortgage buyer. The loans, which allow borrowers to defer principal payments during the initial years of the mortgage, have been declining since last year, Freddie Mac says.
``Borrowers are now opting for the security of long-term fixed rates,'' says Dean Hackemer, president of Access National
Mortgage Corp. in Reston, Virginia. ``The spread between the ARMs and fixed-rate products is so small, most homeowners are willing to pay the difference for peace of mind.''
Buyers are looking for more than peace of mind. They're looking for a deal.
``It's switched to a buyer's market,'' says Karen McCormack, 39, co-owner of McCormack & Scanlan Real Estate in Boston's
Jamaica Plain neighborhood. ``Homes are still selling, but the buyers have much more say in prices this year.''
On a Boston street, lined with a dozen ``For Sale'' signs, McCormack is trying to sell a three-bedroom house listed at $535,000. She's holding ``commuter hours'' open houses on Monday nights to lure would-be buyers on their way home from work.
``When the market was hot, we never would have had to do this,'' she says.

--Editor: Rohner (scc)