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Friday, September 08, 2006

Some Housing Pessimism From Real Estate Brokers

Concerns about the housing market deepened yesterday as the nation’s leading real estate brokers’ group issued a more pessimistic outlook for the year, and two major builders cut their earnings estimates by hundreds of millions of dollars.

The news added to a growing unease about the economy and helped drive shares on Wall Street lower for the second straight day.

The latest report to predict a decline in the housing sector was notable for its source. The assessment from the National Association of Realtors, which has until recently been generally upbeat about the health of housing, was the group’s least optimistic yet.

“The boom is cooling now,” said David Lereah, the chief economist for the association, who added that falling home sales have been “a bit worse than we had anticipated.”

The group said that it now expected sales to fall further than it has said in the past — about 7.5 percent this year compared with an earlier projection of a 5 percent decline. It also said it expected prices nationwide to drop during the next few months, instead of appreciating modestly. If that happens, it would be the first time since 1993 that median home prices have fallen in any given month.

The revised realtors’ forecast came on the heels of announcements from KB Home and Beazer, two of the nation’s largest home builders, that profits this year would be lower than initially predicted.

A third builder, Hovnanian Enterprises, said yesterday that its third-quarter profits fell by more than a third. It left its guidance for the year unchanged.

The Realtors’ association said it expected both home prices and sales would slide in the coming months as the upper hand in the housing market shifts from the seller to the buyer. But that shift has yet to occur fully, with buyers and sellers staring each other down while unsold houses pile up.

“The seller is a lot more stubborn than any of us had anticipated,” Mr. Lereah said. “Sellers for the last five years have been in control. It’s very hard for them to give up control and revise their expectations downward.”

But once sellers begin to drop their asking prices, housing industry officials hope that home sales will start to rise again.

The rising number of homes on the market and aggressive discounting by home builders are putting pressure on sellers to lower their prices, said Ronald J. Peltier, president and chief executive of HomeServices of America, a subsidiary of Berkshire Hathaway that owns real estate brokerage firms around the country.

“It’s going to take the rest of this year at a minimum for that inventory to be liquidated,” he said. “This period of correction is going to take a little while, but it’s healthy for the market.”

The Realtors’ association predicted that, at most, prices will decline for two or three months before picking back up again. For the year, home prices are still expected to appreciate, on average. Not since the Depression have home prices fallen over the course of a full year.

There are already signs that prices may soon start to decline nationwide. In a report issued last month, the Realtors’ association said home prices in July barely inched up. The median selling price for existing homes, which rose at double-digit rates for much of the previous two years, rose only 0.9 percent compared with a year earlier. And that rise was entirely dependent on a 3 percent median price gain in the South, the only region in the country where prices did not fall.

John Lonski, chief economist for Moody’s Investor Service, said, “That’s got to be one of the biggest difficulties facing the sellers of real estate: the uncertainty of the durability of real estate prices into the foreseeable future.”

As KB and Beazer cut their earnings guidance, they cited a growing supply of unsold homes.

“A higher percentage of home closings are being deferred or canceled,” Beazer said in a statement yesterday, “immediately prior to closing in many cases, due to worsening buyer sentiment and the inability of buyers to sell their existing homes.”

Beazer said yesterday that it expected earnings for the year of $8 to $8.50 a share, compared with its previous outlook of $9.25 to $9.75.

KB lowered its earnings guidance for the year to $8 to $8.50 a share, down from an earlier estimate of $10 a share. That is the second time this year the builder has lowered its guidance. Other major builders like Toll Brothers and D. R. Horton have also cut their earnings forecasts.

Wall Street’s reaction was mixed. Shares of KB closed just 1 cent higher, at $40.40 a share, and Beazer dropped nearly 3 percent, to $37.33.

But in a sign that investors were expecting much worse, news of Hovnanian’s profit decline helped lift shares more than 6 percent, to $27.09.

Slowing home sales actually helped give share prices in other sectors a lift in recent weeks. As it became clear that housing was entering a period of contraction — in line with the Federal Reserve’s expectation of an orderly economic cooling — investors put more money into equities, betting that the Fed would not resume raising interest rates.

From Aug. 1 until the beginning of this week, the Standard & Poor’s 500-stock index had risen more than 3 percent. But over the last two days, it has erased about half those gains.

Housing’s decline, said Jeffrey Kleintop, a top investment strategist for PNC, “has encouraged the stock market in the last month or two to run up.” He added: “The market is saying, ‘Yeah, we feel pretty confident about a soft landing here.’ ”

Yesterday’s housing news raised questions about just how soft that landing would be. “As an economy, we’re more sensitive to housing than we’ve ever been,” Mr. Kleintop said, adding that as home values have increased with the housing boom, so has individual net worth. “Having that suddenly go away and pull into a recession really creates a big question mark.”


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