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Median price of new home drops 11 percent { May 25 2007 } Original Source Link: (May no longer be active)
http://www.chicagotribune.com/business/chi-fri_homes_may25,0,5462573.story?coll=chi-business-hedhttp://www.chicagotribune.com/business/chi-fri_homes_may25,0,5462573.story?coll=chi-business-hed
Signs of stability in housing
New-home sales leap, prices drop; inventory fall encourages builders
By William Sluis, Tribune staff reporter. Tribune news services contributed to this report
Published May 25, 2007
Sales of new homes took their biggest leap in 14 years in April, but analysts said it may be too soon to declare that the housing slump is ended.
Some said a steep drop in the price of a typical new house indicated that the revival may be due to nothing more than bargain-hunting among buyers. Builders have been lowering price tags and offering layers of incentives to bring prospects into their sales centers.
But a steep drop in the number of unsold homes sitting on the market serves as a positive sign, said housing consultant Steve Hovany.
"There are clear signs that the market has stopped falling, even though it will take the rest of this year for the industry to sort itself out," said Hovany, of Strategy Planning Associates in Schaumburg.
Overall, sales rose 16 percent, to an annual pace of 981,000 last month, from a rate of 844,000 in March, the Commerce Department reported.
The supply of new, unsold homes dropped to 532,000 from 540,000 a month earlier. That left the supply of homes at the current sales rate at 6.5 months' worth, the lowest this year, compared with 8.1 months in March.
"Builders are rapidly ratcheting down new-home prices to move inventory, and happily, buyers are responding to the price incentives," said economist Scott Anderson of Wells Fargo & Co. in Minneapolis.
However, "buyer traffic in the Midwest still looks weak," he added.
Chicago-area home builders "were caught off guard by the slowness of the spring selling season, which was a total fizzle," Hovany said.
Normally, by this time, half the new-home sales for a year have occurred, he said.
"But this year, if the current total number of sales in the Chicago area were to double, the situation still would be quite gloomy," Hovany said.
Nationally, the glut of unsold properties suggests that home construction is likely to remain a drag on the economy's growth throughout this year and into 2008, economists said.
New-home purchases jumped 28 percent in the South, 8.5 percent in the West and 3.8 percent in the Northeast. However, sales dropped 4 percent in the Midwest.
Compared with a year earlier, new-home sales nationwide were down 11 percent.
The median price of a new home dropped 11 percent last month, the biggest decline since 1970, to $229,100 from $257,000 a year earlier.
Builders "have started dropping prices aggressively," said John Burns, a housing consultant in Irvine, Calif. "When you start offering consumers a good deal, you start selling homes."
The steepest discounts are taking place in the formerly hot housing markets of California, Nevada and Florida, according to Burns.
In the Chicago area the housing market continues to suffer from an overhang of unsold homes and from price discounting, said Bill Gronow, a partner with Kennedy Builders in South Barrington.
"We were overheated and the market isn't bad, but it has returned to normal," said Gronow, whose firm is offering duplex homes from around $150,000 in some outlying suburbs. Kennedy Homes typically targets sales at about $240,000.
The Midwest and the Chicago area "still are down, even from last year's pace," Gronow said. "But we are seeing better-quality traffic at our sales centers."
Strengths in the market include town houses, which appeal to first-time buyers, and housing aimed at those 55 and older, he said.
Home construction is in its worst recession since 1990, losing about 1 percentage point from growth in each of the last three quarters. The economy recently has been expanding at a snail's pace of about 2 percent. Much of the blame has gone to problems in the subprime mortgage market, where defaults have mushroomed.
Nationally, "a three-month moving average shows that new-home sales in April were down nearly 20 percent from a year earlier," said economist Patrick Newport of Global Insight in Lexington, Mass. "Sales may have hit bottom, but it is too early to make that call."
One negative indicator for housing is that interest rates have been on the increase. Rates on 30-year mortgages jumped to the highest level in seven months on Thursday.
"It is important to note, before we get too carried away, that mortgage rates are rising in May, which could put a damper on sales growth in the months to come," Anderson said.
Citing tightened lending standards, the National Association of Realtors this month lowered its forecasts for home construction and sales. It forecast new-home sales to fall this year to 864,000 from 1.05 million in 2006. Existing-home sales will decline to 6.29 million this year, from 6.48 million in 2006, while housing starts will drop to 1.49 million from 1.8 million in 2006, the Realtors forecast.
Sales of existing homes, which account for 85 percent of the housing market, will be reported Friday by the National Association of Realtors. ---------- wsluis@tribune.com
Copyright © 2007, Chicago Tribune
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