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Housing Prices Slide Into Slow Season

With prices already slumping, the normally slow summer will be telling for the health of the sector.

It's news that should surprise no one: Housing prices are falling.

According to the quarterly S&P/Case-Shiller Index, prices declined 1.4% nationwide for the first quarter vs. an 11% rise in the same period in 2006. It was the first such decline in 15 years, and some of the strongest evidence to date that the talk of a softening housing market is making an impression on sellers.

Case-Shiller's monthly 20-city index also showed a decline of 1.4%, while the 10-city index saw values drop 1.9%.

In other words, any way you slice it, gravity is taking firmer hold on the once-buoyant U.S. housing market. The only questions at this point are how far and how fast?

The answers appear to be evident in Case-Shiller, as well as in the two reports released last week on existing- and new-home sales. Each indicates a somewhat mixed picture, although one definitely tinged toward the downside.

Existing-home prices hit a four-year low as empty-nesters and overstretched borrowers continue to bring their homes to market, while homebuilders do their best to clear an inventory backlog that now stretches out more than eight months. This group dropped prices enough -- nearly 11% over the previous year -- to spark a 16% surge in home-buying, a reflection of spring fever and something that few expect to be repeated anytime soon.

Still, against that rise, individual sellers of existing homes will continue to face pressure to lower prices even more. And builders, facing softer markets in most cities -- the 20-city index showed price declines in 13 areas -- also will have to continue to work to meet buyers' lowering price expectations.

Indeed, as the traditional summer lull in sales looms, this could be a pivotal time in the psyche-sensitive world of residential real estate, especially as more buyers sense that time and leverage (the emotional kind) are on their side and push harder for cost-cutting.

Meanwhile, the tightening of the other kind of leverage -- i.e., mortgage lending -- will also keep some homebuyers off the market, especially in harder-hit areas such as San Diego and South Florida.

But just as in the apparently conflicting new- and existing-home-sales reports, the Case-Shiller data also paint a picture of a national market with distinct regional differences.

One area of the country that seems to hold particular promise is

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country: Prices in Seattle were up 10%, while those in another Pacific Northwest capital -- Portland, Ore. -- rose 7%. Clear across the country, in the still-booming financial-services basin of Charlotte, N.C., prices climbed 7.4% year over year.

Not surprisingly, once-skyrocketing Las Vegas and Phoenix were hit hard -- sort of. Las Vegas prices were down 1.6% between September 2006 and March of this year. But that's still after stunning run-ups between 2003 and 2006.

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However, in other cities where an oversupply in the condo markets suggests that single-family housing would be at risk, prices actually rose. Two stunning examples: Chicago, where prices gained 1.3%, and Miami, up 1%. And in Atlanta, where stories of overbuilding and sprawl are legion, prices rose 2%.

Gains like these, though encouraging, are far more likely to indicate an early plateau in the downward movement of pricing than an actual bottom. Indeed, the apparent stability of these markets is reminiscent of another stealth danger that plagues homeowners, as it often goes undetected: dry rot.

Still, some homebuilders may have pulled in the reins enough to ride through a continuing downdraft with relatively less pull on their own share-pricing.

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,

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and

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have already suffered through some bumpy times in the past 12 months, but they have each taken their blinkers off.

That said, how well the market holds its own during the normally slow summer sales season should offer some guidance for how much further homeowners and homebuilders will be willing to let things slide.

At the time of publication, Peter Slatin had no positions in stocks mentioned.

Slatin publishes the independent real estate newsletter theslatinreport.com. He has written extensively about real estate and architecture for publications ranging from Barron's to The New York Times, and is on the editorial board of Real Estate Portfolio, published by the National Association of Real Estate Investment Trusts. He was the founder and editor of Grid, an award-winning real estate business magazine.