For Sale, Still

Housing is turning into a browser's market

Selling a home? Good luck. The market continues to soften despite recent reports that seem to hint at signs of life. Brokers and builders say buyers are on hold, waiting to see if they can cut a better deal. "I am exhausting myself taking buyers out. I cannot get them to commit," gripes a real estate agent in Westchester County, N.Y., where the number of unsold homes rose 38% in the first quarter from a year earlier.

The positive news has to do with housing starts and mortgage applications. On June 20, the Census Bureau said the number of homes on which construction began rose 5%, seasonally adjusted, from April to May. The next day, the Mortgage Bankers Assn. reported a 0.1% increase in weekly applications for mortgages to buy homes -- not a big increase, but better than the decline many analysts expected.

Trouble is, the housing starts number was inflated by comparison with a weak April, when bad weather slowed builders. Permits in May fell 2.1% from April, and 8.5% from a year earlier. The mortgage increase was harder to explain away since applications have basically plateaued since February. But economists say the number is bound to fall, given rising mortgage rates and a growing overhang of unsold homes.

Housing optimists argue that the market is merely settling back to a sustainable pace from an unsustainable boom. "Two or three years ago we would have been killing for this kind of a market," says Thomas R. Kunz, CEO of Century 21 Real Estate (CD ).

But as the housing market continues to soften, more participants are having trouble putting the best face on things. The confidence of builders in June hit its lowest level since April, 1995, said the National Association of Home Builders on June 19. Investors are heading for the exits: Stocks of the biggest builders are down by a third to a half since their peak last summer.

The change in attitude is most pronounced in areas that until recently were superheated, such as Southern Florida. "Sellers are desperate," says broker Mike Morgan, owner of Morgan Florida in Stuart, Fla. He says that home builders there are paying him commissions of 6% to 10% to steer customers their way as they compete for scarce buyers. "I've never seen anything like it."

A slowdown could crimp the national economy even if prices don't fall nationally. Housing -- from carpentry to brokering to sales of dishwashers for new homes -- has accounted for about 8% of gross domestic product recently, says High Frequency Economics, a Valhalla, N.Y., research firm. If the sector falls back to its normal share of 3.5% of GDP over the next year, it could subtract enough growth to put the economy into a mild recession by early 2007, the bearish firm says.

By Peter Coy

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