At last, sanity is returning to the housing market. Appreciation is still strong — in fact, median U.S. home prices in 2005 will surpass 2004's gain. But forecasters expect the pace to moderate in 2006, closer to the historical average of 4 percent to 6 percent.
For homeowners, that's still an inflation-beating return. But if you're thinking of selling your home, expect a retreat from the bidding wars and no-contingency offers. And sellers will have to expend more effort to snag a fair price.
Mark Zandi, chief economist and co-founder of Economy.com, says markets in which home prices have appreciated significantly above their historical averages are seriously overvalued. In that group he includes all of California and Florida, much of the Northeast corridor (from Boston to Washington, D.C., excluding Philadelphia) and parts of the markets in Minneapolis-St. Paul and Chicago. Those areas account for almost half the value of the nation's housing stock — up from about one-third in late 2004.
When might prices fall? Zandi ventures a vague guess: within two to three years. But the longer the party goes on, the worse the hangover will be.
Among the metro areas Zandi identifies as most at risk for declining prices is Bakersfield, in California's Central Valley, where coastal Californians have flocked to find relatively affordable housing — a median price of $235,000, versus $544,000 for California as a whole. Although the city took first place in the United States for annualized price appreciation over the past three and five years, it fell to third, tied with Naples, Fla., in one-year results, in a study conducted by Fiserv CSW, a home-price research company, in Cambridge, Mass.
Local real estate agent Charles Doremus confirms the loss of momentum, though he says it's like "going from 200 miles per hour to 180."
Another of Zandi's at-risk cities is Pensacola, Fla. The region hasn't garnered nearly as much press attention as south Florida, but the loss of homes to Hurricane Ivan in September 2004 has fueled double-digit appreciation, and in some communities, prices have gone wild.
In Fort Walton Beach, about 40 miles to the east, growth in population and jobs are the drivers. In CSW's one-year results, Fort Walton Beach-Destin took first place, with price gains of 49 percent. But local real estate agent Cindy Purves says a slowdown began about midyear.
In both Bakersfield and Fort Walton Beach, housing prices were driven even higher by investors and speculators.