Saturday, October 28, 2006

Housing Prices Plunge in the United States

The price of new homes in the U.S. took its biggest plunge last month since 1970, underscoring for Americans the cascading effect of the country's housing slump.

Faced with a growing glut of unsold homes, U.S. builders are resorting to unusually deep discounts that some analysts fear could turn off potential home buyers, feeding an even steeper downward price spiral.

Falling prices deter buyers. When the new home market goes south, the early buyers can get hurt. That's because buyers may be reluctant to lock in at today's prices if they believe homes will be significantly cheaper in a month or two.

The median price of new homes fell at an annual rate of 9.7 % to $217,000 in September. It was the fourth-largest decline on record since 1970.

At the same time, the volume of sales rose 5.3 % to 1.07 million. The increase follows large downward revisions in the previous two months.

There is also a lag effect of falling prices because most people aren't selling homes in any given month. It may take a while for Americans to realize their homes aren't worth as much as they assumed, and in some cases, as much as they paid for them.

Falling prices aren't confined to the new-home market, which accounts for about 15 % of home sales in the United States. The bulk of transactions involve existing homes, where prices are also falling.

The median price of existing homes fell at an annual rate of 1.8 % last month, and is down 2.2 % from the previous year.

The pressure on the housing market won't end any time soon.

Both new and existing single-family home prices are deflating, which will make households feel poorer.

Economists cautioned, however, that the new-homes sales report is notoriously volatile because builders have greater control over selling prices than individual sellers. Nor do the figures account for the size or quality of homes sold.

There is also evidence that builders have resorted to selling smaller and less opulent homes to attract buyers who have been shut out of the housing boom in many parts of the country.

Monthly mortgage payments have been inching up steadily and now account for nearly 25 % of homeowners' income, up from 19 % in 2003. In California, the ratio is 36.6 %, well above the 30 % threshold of what experts deem affordable.

The uncertainty in the housing market has also spilled over into the rental market, where many would-be home buyers are opting to rent, hoping that prices will fall in the months ahead.

And that is inflating rents and pushing down the vacancy rate. In the quarter ended Sept. 30, the average advertised rent reached $978, up 3.9 per cent from the year-ago period.


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