Prices Should Tumble More Before True Bottom Reached

Housing prices are still in retreat, according to the latest government figures. But a pair of recent surveys indicates that prices have to tumble further before the market reaches equilibrium.

According to Trulia, a real estate search engine, only 27% of the houses currently listed for sale throughout the country have cut their asking prices since first coming on the market. And according to HomeGain, a website that links buyers and sellers with realty professionals, more sellers need to get realistic about what they want if they expect to be successful in the current downturn.

A HomeGain study of some 700 agents found that nearly half of all owners are still very much in denial about what their homes are worth. Owners are aware that prices are falling around the country, but they tend to believe it’s their neighbors’ houses that are dropping in value, not theirs.

“Homeowners know that prices have fallen but that somehow doesn’t apply to them because they have 'upgraded vinyl’ or some such nonsense,” says Pamela Frey-Primiani of Keller Williams Realty in Sicklerville, N.J. “In other words, their house has the 'golden doorknob.’” Ms. Frey-Primiani isn’t the only agent who thinks sellers need to get real. Half the agents surveyed think prices will have to come down more, if only because three out of five would-be buyers who visit their listings believe the houses are overpriced.

“Our survey is telling homeowners their homes are worth considerably less than they think,” said Louis Cammarosano, HomeGain’s general manager.

One reason prices are likely to continue falling, at least in some places, is that the inventory of unsold houses is still way too big.

According to James Gaines, a research economist with the Real Estate Center at Texas A&M University, a six- to six-and-a-half-month supply of homes for sale is just about normal. “Actual equilibrium” in any market can differ slightly, usually between five and seven months, he says. But the latest numbers show there are still far more houses for sale than there are buyers.

Because builders have all but stopped putting up houses on a speculative basis, the number of finished but unsold new houses shrank to 311,000 in March, according to the Commerce Department. But at the current rate of sales, that’s equal to a 10.7-month supply.

The number of unsold existing houses has fallen, too. But with 3.7 million houses still listed for sale, that’s a 9.8-month supply. Of course, all this is relative to where borrowers live, and not just their state or city, either, but their neighborhood or perhaps even just their street.

That’s because all real estate is local. Even in places where prices are still falling, there may be a submarket, a particular neighborhood, or perhaps just a single street where things aren’t so bad. Take Prince George’s County in Maryland. According to an analysis of single-family houses sold over the past 12 months in the county just east of the nation’s capital by agent Ginger Hand of Long & Foster Real Estate, the average selling price fell in all 29 of the county’s ZIP codes.

The average decline was 16.6% and the greatest was 28.3%. But in one ZIP code, the average was off only 7.8%. Unfortunately, there isn’t any survey that drills down that deeply on a local basis, so you’ll have to do your own legwork. And when you do, you’ll want to know not only whether prices are down in a borrower’s neck of the woods but also the trend over, say, a 12-month period, so you can get in front of it.

If prices are falling at a slower and slower pace, for example, sellers may not need to cut their prices as much as they would have had to slash them a year ago. But if prices are declining at a more rapid rate in the jurisdiction you are studying, well, you don’t need a scalpel — you need a butcher knife.