Housing market hitting a rough patch

WASHINGTON (AP) -- Aug. 10, 2006 -- The "For Sale" signs are staying out longer. House prices are easing as sellers try to lure in buyers.



The big question now: Will the nation's five-year housing boom turn into a devastating bust that could derail the overall economy?



"We recognize the risk ... and we are watching it very carefully," Federal Reserve Chairman Ben Bernanke told Congress recently.



The Fed's interest rate increases, which have helped push mortgage rates to the highest levels in more than four years, are putting a damper on housing.



The central bank acknowledged that fact Tuesday when it decided against raising a key short-term rate for an 18th time.



Instead, the Fed's policymakers said they believed the "gradual cooling of the housing market" would help slow the economy and allow inflation pressures to moderate.



The Fed's cease-fire on rate hikes came after various reports showed the housing boom is definitely over.



Sales of new homes and existing homes have been falling. And although the median prices are still increasing, the gains have been the smallest in years.



A record level of unsold homes is expected to exert even greater pressure on prices in coming months.



The concern is that the already sizable inventory glut could worsen as millions of Americans with adjustable rate mortgages, taken out when interest rates were at four-decade lows, suddenly find they can't meet new higher monthly payments.



"So far, the correction in housing has been orderly, but there is a significant risk that this orderly correction could become more chaotic," said Mark Zandi, chief economist at Moody's Economy.com.



"The housing market has been driven by euphoric optimism about future house price growth. That could quickly change to dark pessimism and we could see sales and prices fall much more than expected," Zandi said.



The areas considered at greatest risk for falling prices are the once-booming regions of California and Florida, parts of the Mountain West and the Northeast.



Richard Dekaser, chief economist at National City Corp., has done a study with Global Insight that identified 71 metropolitan areas, representing 39 percent of the single-family home market, as extremely overvalued. Of the top 25 cities on that list, 14 are in California and seven in Florida.



David Lereah, chief economist for the National Association of Realtors, predicts that the sales slowdown is about to bottom-out. He said stubborn homeowners are starting to realize they will need to lower their asking prices to attract buyers.



"We are going from a seller's market to a buyer's market," he said. "It looks like the worst is behind us and sales are starting to level off."



But that process will leave housing sales well below the boom levels of the last few years. Sellers will have to say goodbye to double-digit price gains and some formerly red-hot areas may have to cope with outright price declines.



That could leave sellers and their real estate agents longing for the old days.



"I have seen a number of housing cycles but nothing to compare with the past five years. That was the most robust real estate market that I have experienced, without question," said Miami real estate agent Maurice Veissi, who has been selling homes for 35 years.



Many economists are stopping short of predicting a wholesale bust in the housing market.



"There is no evidence that prices are going to collapse," former Fed Chairman Alan Greenspan said earlier this year.



Still, even a moderate slowdown could have a big impact since housing has been one of the economy's standout performers over the past five years. Low mortgage rates allowed millions of homeowners to refinance and use the savings to go on a shopping spree.



The rising value of homes also boosted consumer spending because it encouraged Americans to spend more. A housing slowdown could have the reverse effect, and consumers already are starting to tighten their belts.



Overall, economic growth slowed to 2.5 percent in the April-June quarter, less than half the 5.6 percent growth rate of the first three months of the year. A fall in residential construction was one of the major contributors to the slowdown.