Housing Decline......

The Economy | Housing decline: How 'temporary'?

By Andrew Cassel
Inquirer Columnist
Posted on Fri, Sep. 08, 2006

You know the boom is over when even the brokers start predicting lower prices. That was true of the stock-market bubble in 2001, and it's true now, as the air comes out of housing.

Yesterday, the National Association of Realtors issued its sales forecast for the rest of this year, saying an "inventory and price imbalance" will likely cause home prices to fall below the levels of a year ago.

Of course, the drop will be only temporary, the brokers' group says, just until "the market works through a buildup in housing inventory."

Anyone who didn't buy a house last year in hopes of "flipping" it for a quick profit should be fine, they assure us. And perhaps they're right.

But as long as "temporary" lasts, we could be in for a bumpy ride.

Other forecasters are less sanguine than the Realtors. Global Insight, the economics firm with offices in Eddystone, found prices falling even in parts of the country where housing has been relatively tame.

In Michigan, Ohio and Indiana - some of the flattest real estate markets in the country - "modest gains have given way to losses as mortgage rates rise and economic conditions soften," the Global Insight team reported.

Closer to home, they found house prices in the Atlantic City area rose only 2.6 percent during the first six months of 2006. A year earlier, the same market saw prices rise nearly 8 percent.

When a gain isn't a gain

But isn't a 2.6 percent increase still an increase? Not necessarily. Houses don't behave like stocks; when the market cools, publicly reported prices are the last thing to change.

First, sales volume slows down. Then sellers start offering "incentives" - discounted add-ons, flexible payment terms or subsidized mortgage deals. The real price can be falling for months before it shows up in anyone's statistics.

That means it could be a while before we know the size of this "correction." And the extent of the fallout - political as well as economic - is anyone's guess.

Some of it may already be starting. In Philadelphia, for example, some developers are shelving or bailing out of projects for fear that the market is becoming saturated with upscale condos and townhouses.

And builders are lashing out on the political front as well. This week, a group of them issued an 82-page tome in defense of the city's 10-year tax abatement for residential construction, which some city politicos want to cut back or abolish.

The builders (or rather their consultants, local firm Econsult) say the tax break has been worth about $4 billion to the city's chronically bedraggled economy, stimulating thousands of jobs and boosting investment and property values all over town.

It's an arguable claim, though you'd need a tweezer to tease out the effect of the tax break from other trends that have boosted urban housing the last few years.

Home builders clean up

But the abatements have brought one undeniable benefit: bigger profits for home builders in the city.

This is not a secret to anyone in the real estate business: Taxes and other ownership costs are "capitalized" - rolled into the sales price of a house. Buyers paid more for properties with tax abatements than they would have paid without them.

How much more? That's the really interesting part. The authors of the builders' report estimate that each year without real estate taxes adds 2.5 percent to the price of a home or condo. A home with a 10-year tax abatement has been selling for roughly 25 percent more than a comparable home without one.

So have builders simply been getting the money that homeowners would otherwise have paid the city in taxes? Yes - and that's not all.

The consultants calculate the real cost of Philadelphia real estate taxes at about 15 percent of a property's sales price. Thus buyers - for reasons the consultants say they cannot identify - have apparently been paying builders $25 in order to get $15 worth of tax relief.

Alan Greenspan once referred to that kind of behavior as "irrational exuberance." The question now is, what happens when it stops?