The House of Paaaaaaain

Housing Market ShowsFurther Signs of Cooling By JAMES R. HAGERTY and RUTH SIMON The pace of U.S. home sales is showing further signs of slowing, amid a widening gap between sellers’ asking prices and the amount skittish buyers are prepared to offer, according to an industry survey, real-estate brokerage firms and housing economists. Rising mortgage rates, higher energy costs, widespread talk about the risk of a “bubble” in housing and a surge in the number of homes on the market are among the factors behind the apparent slowdown. They have combined to make home shoppers more cautious, economists and real-estate brokers say. Buyers are taking their time to look for bargains, while many sellers have put unrealistically high price tags on their homes. That leads to a standoff, causing the number of sales to drop — a classic ending to a period of unusually rapid house-price increases. In a survey conducted last week, real-estate consulting firm Real Trends found that the number of home-purchase contracts signed last month dropped 8% from a year earlier at 48 of the nation’s large real-estate brokerage firms. Those brokers responded to an email poll sent to 80 brokerage firms.

That’s the lead story in today’s WSJ, and, as usual, it arrives six months too late to help anybody stuck with a just-closed-on McMansion in Upper Bergen County.

My apologies to Jim Cramer for stealing his wonderful Mad Money “House of Pain” routine for the title of this piece, but that was all I could think of as I read through the article, with quotes like “the frenzy is over” and “newfound sense of urgency among sellers to get out.”

Today’s environment reminds me of the early 1990s, when the housing market in New England (and all across the country) flamed out after years of overbuilding marked by a condo frenzy that ended only after sucking in every last possible buyer, (including my parents).

I got so bearish I put our house on the market. We fixed things up, put in a bright new kitchen window and invited realtors in for a look. At the end of the day we had over 100 real estate agent business cards on our dining room table.

And we got precisely one bid for the house.

I grabbed the bid and never let go, even when they asked for a new roof on the garage and my attorney told me to break the deal.

Whether or not this cycle ends as badly as that last cycle remains to be seen. One could argue that very little has changed from last summer’s Time Magazine this-has-to-be-the-peak front cover everybody-in-the-pool story on housing (see this blog’s The Last, Best Hope For Prosperity about it, June 12)—if anything, the economy is stronger than anybody had reason to expect back then.

But short-term interest rates are up a bunch, and even the long end has moved up lately, yielding mortgage rates at a two-year high. And don’t think every potential buyer still out there doesn’t read the newspaper headlines that say “the frenzy is over” without re-thinking their bid on that McMansion.

If there’s any doubt about the fact that this particular housing cycle is over, even the chief economist of the National Association of Realtors told the Journal, “The air is coming out of the balloons”—and when was the last time you heard the chief economist of any association say something like that?

It is indeed looking like a house of pain.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.