House hunters' tip: Prices may fall, a first in 13 years

U.S. home prices may fall for the first time since 1993 as a record number of houses for sale gives buyers the upper hand in negotiations, the National Association of Realtors (NAR) said.

"We'll probably see prices dip temporarily below year-ago levels as the market works through a build-up in housing inventory," David Lereah, NAR's chief economist, said in a report released Thursday by the real-estate industry's largest trade group. He didn't provide a monthly median estimate.

The inventory of new and existing homes for sale has swelled to record levels as the five-year U.S. housing boom comes to an end. Shares of U.S. homebuilders slid almost 6 percent in the last two days as Hovnanian Enterprises reported a 34 percent reduction in earnings, followed by Beazer Homes USA and KB Home both lowering their earnings forecasts.

Short-term housing investors, so-called "flippers," are putting their properties up for sale, making for "an increasingly challenging housing market," KB Home Chief Executive Bruce Karatz said in a statement Wednesday that detailed the builder's 43 percent drop in new orders.

"People who purchased last year with the intent of flipping are likely to get burned," Lereah said.

The last time the monthly U.S. median price for an existing home fell below the year-ago level was February 1993, when it dipped 1.1 percent. On Sept. 25, the group will report existing-home prices and sales, which represent about 85 percent of U.S. housing sales. The Commerce Department will report new-home prices and sales Sept. 27.

The Federal Reserve said Aug. 8 that "cooling" in the housing sector is weakening the economy, and ended a series of 17 consecutive increases in its overnight lending rate. Home sales and ancillary purchases such as new furnishings and renovations account for as much as 23 percent of GDP, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Mass.

"Housing markets and home-construction activity weakened throughout the nation," the Fed said Wednesday in its regional survey, known as the Beige Book. The slump could deepen "in the months ahead," the report said.

The median price of new houses probably will rise 0.2 percent on an annualized basis in 2006, the worst performance since prices fell in 1991, as the market was mired in a housing depression, Lereah said. The median price for an existing home probably will gain 2.8 percent, the slowest rate since 1992, according to NAR data.

Sales of houses and condominiums declined to an annual rate of 6.69 million in the second quarter from a 7.19 million pace a year earlier, the National Association of Realtors said Aug. 15.

The median price for a condominium dropped 0.3 percent to $225,800 from a year ago, the first decline on record, while the median for a single-family home rose 3.7 percent to $227,500, the slowest pace in six years.

The U.S. inventory of unsold existing homes rose to 3.86 million in July, the highest ever, according to NAR. The number of new homes for sale reached a record 568,000, according to Census Department data.

The average rate for a 30-year fixed mortgage was 6.78 percent in June, the highest since April 2002, according to Freddie Mac data. This week, the rate averages 6.47 percent, the No. 2 U.S. mortgage lender said in a report Thursday.