Homebuyers Waiting For Real Estate Deals, Home Prices to Drop Further

Shandon Fowler is prepared to rent while itching to get into a house of his own.

The New Jersey resident plans to move soon to Charleston with his wife and infant son for a change of lifestyle. But even though the couple can afford to buy a house now, they plan to rent as they learn the layout of the Lowcountry and watch for the local real estate market’s next move.

“Our hope is that the prices come down and we can get more for our money,” he said.

The Fowlers are like hundreds, if not thousands, of other potential buyers who are waiting on the sidelines to see whether real estate values in Charleston will drop.

For more than 18 months, the market has shown signs of weakness. And basic economics suggests that after a significant drop-off in sales, prices quickly would follow, especially in a market where more than 10,000 sellers are courting an increasingly limited pool of buyers.

But that’s not the case, at least not across the entire market.

So far this year, the median sales price for the Charleston region actually has risen by nearly 2 percent to $210,000, while home sales tracked by the local real estate industry’s main trade group are off 20 percent through September compared with the same period of 2006.

To a limited degree, sellers have been cutting prices on existing homes in nearly all of the 36 zones where the Charleston Trident Association of Realtors follows sales through its Multiple Listing Service database.

But in a few places, including a section of West Ashley, the level of discounting has reached the point where the median prices for those specific areas has fallen, according to MLS data. Among the reasons: Sellers of existing homes are being forced to compete with deep discounts and incentives offered in brand-new nearby developments.

It’s anyone’s guess what will happen to prices ahead of a market recovery, which the National Association of Realtors expects to happen at the national level late next year. Meanwhile, the Fowlers and other would-be buyers will wait patiently, trying to time the bottom of the market before jumping on the best deals.

“It’s certainly a buyer’s market, but there is absolutely no urgency on them to buy a house,” said Tom Guidera, a Mount Pleasant-based broker with Prudential Carolina Real Estate. “They see a soft market. They see sellers reducing their prices daily. … They are not worried about interest rates, and they have time on their side. So why not wait?”

Sticky notes

The two trends, slumping sales and rising prices, don’t seem to make sense. But academic experts say real estate values do not strictly follow the rules of supply and demand. Part of the disconnect stems from what economists call “sticky prices.”

The sticky-prices effect occurs when the value of certain services or commodities does not fall significantly even as demand for those services or commodities does, said Frank Hefner, an economics professor at the College of Charleston.

For example, gasoline prices are slow to fall at the pump even when the price of a barrel of oil drops substantially. And the same thing happens in the labor market when work becomes scarce.

“In a boom time, if wages go up from $30,000 to $43,000, they don’t cut the wages back down to $30,000 when the recession hits,” Hefner said. “They lay you off.”

Home prices are unique because a massive pool of individual sellers and buyers, not industry executives, controls the movement of prices, he said.

Patty Scarafile, chief executive officer of Prudential Carolina Real Estate, the region’s largest residential agency, said the median price in Charleston isn’t as volatile as in other markets.

“If you compare it to Southern California, our appreciation wasn’t nearly as great (during the recent real estate boom), and conversely, our correction is not as severe as well,” she said.

Fudgy Brabham, broker-in-charge of Harbourtowne Real Estate, said the median figure in Charleston has been partly propped up by sellers who have paid closing costs or bonuses instead of lowering their prices. “The concessions that are being made artificially hold up values,” he said.

In this type of market, Brabham said, he sees two types of sellers, both of whom can influence prices: the “want to sells” and the “got to sells.”

In the past, sellers who could wait out a downturn for a few years eventually got their asking price, he said.

But it’s the got-to-sells who will dictate whether prices fall significantly, he said. If enough of them get desperate, they can “torpedo the pricing in the market because they are going to take less money for the property, and it will erode the support for the high pricing,” Brabham said.

Some have speculated that the top end of the luxury market has inflated the median home price for Charleston, but it would require a significant increase in the number of sales of those properties to skew the figure. MLS research shows that demand for seven-figure historic homes downtown and vacation homes on the barrier islands has slowed along with the broader market. Even so, prices for luxury properties remain strong.

Charles Sullivan of Charleston-based Carriage Properties says many high-end buyers continue to be willing to pay more per square foot than a year ago despite fewer sales.

“I think our market has shown that we tend not to have wild swings up or down price-wise, and maybe that is giving buyers comfort when compared to other markets, say, in Florida,” Sullivan wrote in an e-mail.

SELLERS In Denial

The resistance among sellers to lower prices is not exclusive to Charleston, said economist Patrick McPherron of Moody’s Economy.com, an international economic analysis firm based in West Chester, Pa. Rather, it’s a nationwide tendency that’s causing the median price either to remain stable or slightly drop in many local and regional housing markets, he said.

Summing up the mentality of many sellers, McPherron said much of “the country’s in denial” because sales volume does not support what they are expecting for their homes.

But prices have slipped to a measurable degree in some pockets of Charleston.

Compared with last year, existing homes are selling for less in parts of West Ashley, Johns Island, the Jedburg area and on Daniel Island, according to MLS data.

Harbourtowne Real Estate’s Steve Yaeger, who has several listings in West Ashley, said the sellers he represents are paying more attention to their asking prices after having to compete for buyers with new developments farther away from the city, such as Carolina Bay. That community, being developed by Centex Homes, is offering homes starting in the low- to mid-$200,000 range.

He said all of his West Ashley clients have been willing to reduce their asking prices.

“Even people that want to live inside the Mark Clark (Expressway) because it’s closer to the city are thinking that they could live five minutes farther away and get a new home for about the same price,” Yaeger said.

A similar scenario is playing out on the outskirts of Mount Pleasant, where homes are selling at about the same median price, $404,577, as last year, according to the most recent sales data. There, sellers of existing residences are competing with heavy incentives offered by builders in big developments such as Park West, agents believe.

But the opposite has happened in the other, older half of Mount Pleasant, the section closer to Interstate 526, the Ravenel Bridge and the peninsula. While sales volume has fallen off within the area south of S.C. Highway 41, the median home price has risen steadily, up 18 percent from last year to $369,000.

Prudential’s Guidera said the difference reflects people’s willingness to pay more to live close to downtown Charleston or a major interstate artery.

“Even though you’re dealing with older homes, people are trading in their newer homes for a shorter commute,” he said.

He also noted that the pricing power south of Highway 41 can be attributed partly to the town’s demographics. Because it’s an area where older, more established families live, more sellers are able to handle a second mortgage and avoid offering deep discounts. But he doesn’t expect the area’s double-digit appreciation rate to carry on for much longer as the competition gets tougher among serious sellers.

Subprime fallout?

Unlike past housing downturns, the current slump features a wild card that could hurt prices in the months ahead: the subprime mortgage crisis.

Subprime refers to a type of loan made during the housing boom to people with checkered credit histories. The concern now is that many of those borrowers will not be able to make their payments once the introductory interest rates on their mortgages rise, forcing banks and other lenders to foreclose on the properties.

Karl Case, an economics professor at Wellesley College in Massachusetts, said rising home foreclosure rates could lead to more housing auctions. And a sell-off of homes on the steps of the county courthouse could dramatically lower home prices across a broad area, he said.

But no one can say with any accuracy how severely the subprime mortgage debt could weigh on the market. It’s uncharted financial waters, Case said.

“You really have not tested this subprime stuff before,” he said.

Buyers play waiting game for best deals
By Katy Stech | The Post and Courier