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U.S. Home Sales Accelerate as Prices Decline Amid Rebound


The third decline in home prices is spurring sales as bargain hunters rush to buy before rates rise

The third decline in U.S. home prices in three years is driving a pickup in sales as bargain hunters rush to buy before mortgage rates rise, even as values may slump further.

Mounting foreclosures pushed the median price for a U.S. existing home to $158,800 in January, the lowest level since 2002, according to the National Association of Realtors. At the same time, sales climbed 22 percent from October, the biggest three-month gain since the end of a homebuyer tax credit. The rally began as mortgage rates started to rise from record lows in November and the economic expansion picked up speed.

"The job market is beginning to gain traction, consumer confidence is improving, and even though mortgage rates have increased, they're near historic lows," said Mark Zandi, chief economist of Moody's Analytics Inc. in West Chester, Pennsylvania. "Prices may go down a bit more, but we're still seeing a pop in sales."

Fannie Mae, the largest mortgage-finance company, forecasts home prices will fall further this year and sales will jump. Discounts on foreclosed properties are eroding the values of other homes, making houses more affordable and opening the market to more people. A sustained increase in sales may signal a bottom in values as prices fall to levels buyers can't resist.

Beating Rate Increases

The average rate for a 30-year fixed mortgage was 4.87 percent last week, almost three-quarters of a percentage point above the record 4.17 percent in mid-November, based on data from McLean, Virginia-based Freddie Mac, the No. 2 mortgage- finance company. It may be close to 6 percent by the end of the year, according to a forecast by the Mortgage Bankers Association in Washington.

"If we can strike a deal before rates go any higher, we can get a lot more house for our money," said Matt Arnold, 30, who is shopping for a four-bedroom home in Carlisle, Pennsylvania, with his wife, Jillian. "Even if prices drop some more, it's still a good time to buy."

A revival in transactions may be limited in the short term as buyers wait for the traditional spring selling season and as rising energy prices damp demand, said Thomas Lawler, a former Fannie Mae economist who is now a Virginia-based housing consultant. Oil has climbed to a 29-month high following political turmoil in the Middle East and North Africa.

An index of pending home sales fell 2.8 percent in January, according to the Realtors group. It is 17 percent above a record low in June.

"Typically, when there's been a spike in gasoline and oil prices of this magnitude over a very short period of time, confidence goes down for a short period," Lawler said. He estimates a home-sales rebound in the second quarter.

Tax Effect

Prices are falling again after seesawing in 2009 and 2010 because of the federal tax incentives for homebuyers. The credits cost $16.2 billion in tax revenue, according to the Government Accountability Office in Washington. There is no plan to renew the benefits as Congress wrangles over budget cuts.

"The tax incentives are why we are seeing this triple dip in prices," said Nariman Behravesh, chief economist of IHS Inc. (IHS), a research firm based in Englewood, Colorado. "Without the credits, we wouldn't have seen such volatility because prices would have declined right to a bottom and we would be into a sustained recovery by now."

'Artificial' Gains

The price slump that ended in January 2009, the month before Congress authorized the first credit, was followed by a 10 percent increase as people took advantage of the original version, limited to first-time buyers. The second price decline, which ended in February 2010, was supplanted by an 11 percent gain after the incentive was expanded to include existing homeowners.

"Any price gains we've seen over the last two years have been artificial because they've been driven by policy initiatives," said Dean Maki, chief U.S. economist for Barclays Capital Inc. in New York.

Prices have fallen for seven straight months in the current dip and are 31 percent below their 2006 peak, according to the National Association of Realtors. The decline has exceeded the 27 percent price drop from 1928 to 1933, the worst years of the Great Depression, said Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate data company.

Measured annually, existing home prices probably will decline an additional 2.2 percent in 2011, according to Washington-based Fannie Mae. The median price for a new home may drop 2.4 percent, the company said in a Feb. 10 forecast.

Jump in Transactions

Even with the threat of more price declines, home resales probably will gain 6 percent in 2011 to a four-year high, Fannie Mae said. Transactions for new houses may rise 18 percent to a three-year high, after falling to an all-time low in 2010, the company said. Sparse sales in January shrank the new-home share of the market to a record 5.4 percent from 16 percent in 2005.

Negative equity, or when the value of a house is less than the amount owed, will crimp a rebound in sales as it keeps about a quarter of mortgage holders stuck in their current homes, said Sam Khater, chief economist for CoreLogic Inc. (CLGX), a research company in Santa Ana, California. Some of those people may walk away if falling values push them further underwater, he said.

"Negative equity is keeping some homeowners out of the market because they would have to come up with that amount if they want to sell," Khater said. "Or it could drive them to foreclosure, which puts added pressure on the market."

Record Foreclosures

The number of homes in foreclosure in January rose to a record 2.2 million, Lender Processing Services Inc., based in Jacksonville, Florida, said in a report on its website. While that inventory climbed, the share of mortgages with late payments fell to 8.2 percent in the fourth quarter from 9.1 percent in the previous three months as the economy improved, according to the Mortgage Bankers Association.

The states with the highest home-loan default rates had the biggest price gains during the 2000 to 2005 real estate boom, and are the ones most likely to see greater prices declines. In Florida, 14 percent of mortgages were in foreclosure in the fourth quarter, the most in the nation, according to the mortgage bankers group. Nevada, No. 2, had a 10 percent share.

Prices gained 130 percent in Florida and 117 percent in Nevada during the boom, according to the Federal Housing Finance Agency in Washington. The nationwide increase was 58 percent.

'Bad-Boy' States

"The places with the worst price outlooks have been the bad-boy states where things got out of control," said Dennis Capozza, a housing economist who teaches at the University of Michigan in Ann Arbor. "The places that are doing much better didn't have a bubble, or much of a bubble."

Texas had a price gain of 28 percent in the five years ended in 2005, about half the national average, according to the housing finance agency. Since then, prices climbed an additional 8.8 percent while they slid in other parts of the country.

In West Virginia, prices increased 30 percent from 2000 to 2005, followed by a 6.3 percent advance since that time. Oklahoma values rose 29 percent in the boom and an additional 9.6 percent in the past five years, the FHFA data show.

Job creation is key to the national housing outlook, said Barclays Capital's Maki. The unemployment rate fell to 8.9 percent in February, the lowest since April 2009, the Bureau of Labor Statistics said last week.

"Job and income growth are strengthening, which is helping to drive sales higher," Maki said.

Measured annually, the jobless rate probably will average 9.1 percent this year, down from 9.6 percent in 2010, according to the median estimate of 65 economists in a Bloomberg survey. Gross domestic product will grow 3.2 percent, compared with a 2.8 percent pace in 2010, the economists predict.

"We are not quite done with the housing crunch," said Behravesh of IHS. "But the home-price bottom is getting nearer."


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