Even Hot Housing Markets Can Go Cold

Nationwide, strong markets like Provo, Utah, are beginning to feel the housing slump

A year ago the six-bedroom house where Scott and Dawn Norton raised 10 children in the shadow of a Utah mountain range would have been snatched up.

The Provo (Utah) home, which is listed for $368,000, seems to have plenty going for it besides scenic lake and mountain views. For most Americans, the housing slump began in 2006, but in Provo and adjacent Orem, home prices leaped 14% in the quarter ending Sept. 30, compared with the same period in 2006, according to the Office of Federal Housing Enterprise Oversight's Nov. 29 report. Only one metropolitan area in the nation—the city of Wenatchee, Wash., in the eastern foothills of the Cascade Mountains—saw higher price appreciation.

Still, the Nortons have knocked $30,000 off their original asking price, set five months ago, and are giving a 3% discount to any buyer who comes to the closing table without an agent. Why offer incentives in a hot market? Well, it seems that even some of the nation's strongest markets, including Utah, the state with the highest third-quarter year-over-year appreciation, are losing steam. "We live in a great area, and I know we're priced reasonably," says Dawn Norton. "I've had a Realtor tell me, 'It's not just your house.'"

No Place Is Immune

Unlike previous downturns, this housing slump is affecting even areas and properties that should be immune. Prices are rising in some places, but not as much as they were, and the pace of sales is down almost everywhere. The hottest markets have likely already been weakened by tighter loan restrictions in the wake of the subprime mortgage mess.

"I keep hearing that Utah's economy is great," says Kevin Shoell, who owns title company Title One in Salt Lake City. "But the housing market isn't great. I've heard the stats before [about the state's home prices]. Everybody in the industry is looking around and saying, 'Who are they talking about?'"

The credit-tightening brought on by the subprime mortgage crisis took hold in August, but its impact on home prices won't be quantified until the fourth-quarter 2007 data are released next year. "It's really hard for any state to escape a downturn of this magnitude," says David Stiff, chief economist for Fiserv Lending Solutions in Brookfield, Wis. "There are places that won't drop. But the strongest markets will roughly be growing at the rate of inflation, so in real terms, they'll be treading water."

Where the Housing Boom Hangovers Are

Of course, speculative markets such as Southern California, Nevada, Arizona, and Florida are suffering the worst housing boom hangovers. Developers during the boom overbuilt to accommodate flippers and buyers with no-money-down mortgages and other creative loans that are going into default. But prices are also falling in Ohio and Michigan and other Midwestern states with troubled manufacturing economies that never experienced much appreciation during the boom. New England has also cooled off: "It was early to come into the boom and early to exit the boom," says Andrew Leventis, a senior economist with OFHEO.

Less than two hours from Yosemite National Park, Merced, Calif., is the nation's worst-performing housing market, at least according to the OFHEO's third-quarter data. Prices in Merced plunged 13% from the third quarter of 2006. Merced also leads the nation in foreclosures with one filing for every 82 households, nearly seven times the national average, according to Irvine (Calif.)-based RealtyTrac. The best market was picturesque Wenatchee, a city of more than 35,000 that is the seat of Chelan County, Wash. Prices in the Wenatchee metro area increased by 15.7% year over year in the third quarter.

States that had the largest quarterly price growth generally had healthy economies. Rising fuel prices have been a boon to energy-producing states such as Texas, Wyoming, New Mexico, Colorado, Oklahoma, and North Dakota. The falling dollar has helped states with export-heavy economies such as Washington.

Transactions Dropping in the Pacific Northwest

Home prices jumped more than 10% in second home markets in Utah, Idaho, and Colorado. "They're doing so well because they're getting the runoff from California, Nevada, and Arizona," says Jeannine Cataldi, senior economist for Global Insight. "When prices got so high [in those states], people said, 'There must be places that are more affordable.'"

But even the nation's hottest markets are slowing. In the Pacific Northwest, where many markets have been bucking the national trend, the pace of sales transactions and price appreciation is dropping off.

In Wenatchee, real estate agents acknowledge the softening. "We've had a little bit of a slowdown but nothing compared to what we're seeing in the rest of the country," says Lisa Day, a Realtor with Lisa Day Group at Century 21 in Wenatchee. "In my market, prices have gone up and they've plateaued. You're seeing a little bit of a plateau now."

Utah Not Crashing

Day says Realtors in Wenatchee are still busy. But Merced real estate professionals are leaving the business or adjusting quickly to disastrous conditions. Jessica Rattanasack, a Realtor with Century 21 M&M Associates in Merced, said she started selling foreclosed properties during the summer and now 90% of her sellers are banks.

Katherine Zupan, who owns My Very Own Room in Merced, used to help residents stage homes—that is, decluttering, cleaning, and preparing properties for quicker sales and higher closing prices. But she no longer feels comfortable taking business from Merced sellers who appear to be calling her out of desperation. "It's hard even for a staged home to stand out from the rest of the homes when new home prices are comparable to resale homes," Zupan says.

Shoell, the Utah title company owner, says prices aren't crashing in his state. But it's not "all wonderful here," he adds. "We're always about two steps behind everybody else, but we'll feel it."

Check out the BusinessWeek.com slide show to see the best- and worst-performing housing markets in the U.S.

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