Getting Real About Real Estate

Last year the question was whether the housing boom would slow down. Now it’s how bad it will get. Navigating the market is more challenging than ever.

By Ellen Florian Kratz

January 30, 2007

Bret and Tricia Baird are all too aware of what they’re getting into. Friends and family have admonished them to rent when they move this month to Mesa, a suburb of Phoenix, for Bret’s new position as product manager with Bard Peripheral Vascular, a medical-device manufacturer. In the past few months the Bairds have been researching local real estate online and haven’t liked what they’ve seen. With an inventory of more than 38,000 homes for sale, up to 94% from this time last year, Phoenix is one of the shakiest markets in the country. Nevertheless, Bret and Tricia, both 35, have decided to make a leap of faith. Mesa is Tricia’s hometown, and the couple, who have four young children, are planning to live there for a while. So they just put in an offer of $400,000 for a 2,700-square-foot, five-bedroom house right next door to her sister.

The place looks like a pretty good deal—8% off the original asking price of $434,000 and $5,000 less than what the seller paid for it last year. But with the way things are looking in Phoenix, the Bairds realize they could be paying too much. Tricia’s sister, for example, bought her house two years ago for $225,000. “We’re nervous,” says Tricia. “If for some reason we have to sell a couple of years from now, we’re not confident that we could get what we paid for it.”

This time last year the big question was whether the real estate market was going to slow down. Today it’s “How bad will it get?” The numbers tell a confusing story. For existing homes, buyers are trickling back into the market—sales inched upward in October even as the median home price fell by 3.5%, the largest year-over-year drop on record. And that comes after price declines in August and September. On the new-home front, sales in October fell, but the median price crept upward. For homebuilders, cancellations are up and orders down. Last month the White House revised its GDP forecast downward due to a housing decline that’s unfolding faster than expected. “It’s possible that the broader housing market will firm in the next few months, that the worst is over,” says Mark Zandi, chief economist at Moody’s Economy.com. “But that to me is a dead-cat bounce.” In a word, yikes.

So FORTUNE asked Zandi’s group and real estate valuation company Fiserv Lending Solutions to give us their take on what lies ahead for housing in the country’s 100 largest metropolitan areas. The picture, as you probably have guessed, isn’t pretty. In 2007, 36 of the 100 biggest markets are expected to see price declines. For 2008 that number rises a notch to 37. The area poised for the biggest fall in 2007? Stockton, Calif., where prices are expected to drop by 7.1% and another 5.3% in 2008. If you were lucky enough to have bought a couple of years ago, the 23% price growth in 2004 and 30% in 2005 should cushion any blow. But buyer, beware. If the forecast holds true, a home purchased in Stockton today for $350,000 will be worth a mere $307,917 two years from now. And that doesn’t account for the additional toll inflation can take on the true value of the asset. Next in line to take a turn for the worse: Las Vegas, where our forecasters think prices will sink 6.6% next year and another 8.1% in 2008.

But let’s keep all this in perspective. If you’re like so many other homeowners, the value of your abode has no doubt appreciated handsomely thanks to the great American real estate bonanza. Sure, you may not be able to cash out for as much as you could have gotten last year, but we’re betting you can sell it for a lot more than you would have gotten five years ago. And remember that your home is your castle, not your 401(k). It’s a place to shelter your family and rest your head. So while it’s wise to keep the near term in mind when making decisions, long-term perspective is what really counts in the real estate game.

What to do? Whether you’re buying, selling, or staying put, we’ve put together some simple strategies that can make a big difference for you and your home.

Sellers: Lower Your Expectations

In order to seal the deal in Mesa, the Bairds need to sell their home in Plymouth, Minn. Initially their concession to the slowing market was to price their home at $310,000, which is less than the $324,000 asking price for the most recent sale in the neighborhood, even though their house has a slightly better layout and nicer views. But after noticing FOR SALE signs lingering too long in other people’s front yards, they reconsidered. Last month they put their 2,200-square-foot home on the market for $299,900. “It’s a little depressing,” says Bret. “But that’s what we think the market is willing to pay.” Assuming they get full price, they’ll be lucky to make a few bucks more than the $279,900 they paid two years ago after commission and closing costs.

But they made the right call. As painful as it might be to realize that your house isn’t worth what you thought, asking too much in a slow market is a mistake. “Trying to get last year’s price is wishful thinking,” says Hessam Nadji, managing director with real estate advisory firm Marcus & Millichap. “Often you’re unable to sell your house, which compounds itself, and you keep chasing the market down.” Just ask Rob Sakey, 46, of Northampton, Mass. He and his siblings put their grandparents’ Victorian in Cambridge, Mass., on the market for $2.1 million last year, when real estate in the area was starting to slide. After four months they lowered the price to $1.9 million. Then $1.7 million. At $1.5 million, they started getting bites. The house is now in escrow for $1.2 million.

You’ll also need a reality check when it comes to the physical appeal of your home. In the days of bidding wars and waiting lists, buyers were so happy to land a house that they scarcely noticed carpet stains and chipped paint. Today they are picky about the cosmetic stuff. Already Bret and Tricia have laid new carpet, repainted, and replaced the kitchen sink. “We’re making lots of trips to Home Depot,” says Bret. That’s the spirit all sellers should adopt. “If it takes repaving the driveway or retiling the bathroom to get the house sold, do it,” says Zandi. “Don’t play a game of hoping the right buyer will come along just in time.”

Buyers: Drive a Hard Bargain

Shim and Neesa Patel were ready to pounce on a brand-new home in San Diego early this year. It was a 4,300-square-foot Spanish colonial coming on the market for $1.2 million. But two months before the house became available, Shim, a 35-year-old engineer for Qualcomm (Neesa is 30), noticed that local home sales had more or less ground to a halt. “It made me very uneasy,” he says. The couple stood pat for nine months—and for about the same price, they’re getting a place that’s 1,000 square feet bigger.

If you’re purchasing from a developer, push especially hard. Unlike individual sellers, who are prone to get emotional and dig in their heels, developers cannot afford to wait. “Builders are doing anything to move their inventory, because it costs more money to carry it,” says Ivy Zelman, a housing analyst with Credit Suisse. “Free cars. Vacations. No closing costs. You name it. [They’re discounting] anywhere from 6% to a third off the base price.”

1 | 2 | 3 Next Page>