DALLAS – The five-year housing boom is indeed over, judging from growing statistical evidence and the performance of some of the nation's leading builders, and the slowdown is already rippling through the economy.
In the last week, the Commerce Department reported that January sales of new single-family homes fell 5 percent — the fourth decline in seven months — and the backlog of unsold new homes hit a record. And the National Association of Realtors said used home sales slipped 2.8 percent in January, the fourth straight drop and 5 percent below January 2005.
Builders also reported a few hiccups. Upscale Toll Brothers Inc. (TOL) said signed contracts in the November-January period fell 21 percent from a year ago, and KB Home reported more buyers backing out of contracts.
Still, the prospect of a housing slowdown appears less frightening than it did a few months ago, according to those who track the industry. There seems to be little concern that a much-touted housing bubble will lead to a collapse in sales and prices.
New Federal Reserve Chairman Ben Bernanke said last month housing would enter a moderate slowdown but not a crash.
William Mack, a housing analyst for Standard & Poor's, predicted "a soft landing. The overall market is just taking a step back."
Explanations for the recent cooling-off vary. Many people bought homes during the past five years and are staying put. Some analysts blame a decline in consumer confidence. And interest rates have been rising, especially for adjustable mortgages that allowed people to buy more expensive homes than they could have afforded with a 30-year loan.
"We started to see the strain in July and August, and by the fourth quarter the market definitely had slowed," said Layne Marceau, president of the Northern California region for Shea Homes, one of the nation's largest private builders.
Rising prices and interest rates pushed more buyers out of the market. When prices finally did cool, sellers couldn't command a high enough price on their old house to buy the new one, said Marceau, who believes the slowdown is temporary.
Builders don't like to cut prices — it angers customers who paid more — but last week, Centex Corp. advertised $25,000 off on select homes in the Dallas area after making a successful similar offer in California. Around the country, builders are throwing in incentives ranging from financing help to free upgrades like swimming pools and granite countertops. Some equal 10 percent of the home's list price.
The median price of an existing single-family home has declined since peaking at $219,700 in July to $210,500 in January, according to the National Association of Realtors. Few analysts expect a sharp drop in national averages, although they say there could be further declines in some areas that have been among the hottest markets in recent years.
David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area "have the largest potential for a price slowdown."
The rising prices in those markets were fed by speculators who bought homes intending to "flip" or sell them for a quick profit, Seiders said. "The biggest fear I have is investor-owned units coming back on the market in large numbers," he said.
Analysts said markets in Florida and the Carolinas seemed to be holding up well. Hovnanian Enterprises Inc. reported last week that home contracts jumped 61 percent in the Southeast but fell nearly 11 percent in the Southwest and 37 percent in the West during the November-January period. The builder's profit was flat with a year earlier.
The slowdown that is showing up in national statistics hasn't reached all parts of the country.
"I've never seen a market as good as this," Mike Mishler said as he took a break from making finishing touches on a $1.6 million lakeside home near Dallas. "Maybe it will slow down in a couple years, but right now we have lots of California folks coming in, and empty-nest people looking for new homes."
Mishler, president of the local builders association, says Texas markets are holding up because they are affordable — the median price in Dallas is $145,000 compared to the national average of $213,000. But even in Dallas, the inventory of unsold homes rose to a record in the fourth quarter.
By price, the middle and upper ends of the new-home market did best in 2005, with solid increases in everything above $200,000, reflecting strongest markets were in high-priced areas along both coasts. That pattern mostly continued in January, although there was a dip in the $400,000 to $750,000 segment compared to January 2005.
Housing has played a major role in the economic recovery since 2001, so even slower growth in home sales and prices could have major repercussions.
Asha Bangalore, an economist for The Northern Trust Co. in Chicago, estimates housing created 43 percent of all new jobs from late 2001 until mid-2005. That included the obvious, such as jobs in construction and mortgage services, but also retail and service jobs that were created because consumers tapped their rising home equity to buy more things.
"The housing slowdown that we are seeing is very modest, not alarming, but I think the ripple effects are going to be enormous because of the employment factor," she said.
For now, home builders are busy finishing the houses that customers ordered last year. In a sense, their 2006 results are already on the books, and they expect another good year.
"This will either be our most profitable or our second-most profitable year in the company's history," Joel Rassman, chief financial officer of Horsham, Penn.-based Toll Brothers, told investors this week. Its profits rose about 50 percent in 2004 and nearly doubled last year.
Investors, however, have been bidding down the stocks of home builders since July, prompting executives to complain that their companies are undervalued despite record earnings. The nine largest publicly traded builders have seen their shares fall 14 to 44 percent since their peaks, with Toll Brothers and Hovnanian the biggest losers.
Alex Barron, an analyst in San Francisco for JMP Securities, said builder stocks have been trading at relatively low multiples of their earnings since the late 1990s because investors always believed the strong housing market was too good to last.
"Investors kept saying, 'Next year housing will go down,'" Barron said. "I guess they're finally right."