Home-Price Decline Spreads

Number of Metro Areas Hit Reaches Three-Decade High; Toll Brothers Feels the Pinch
In the latest sign that the housing market is deflating at a record pace, the National Association of Realtors said prices declined in more metropolitan areas in the first quarter than at any time in the past three decades.

The trade group said median prices fell in about 100 metro areas -- the most since the trade group began keeping such records in 1979. It also said Tuesday that median home prices rose in 48 metro areas -- the lowest number on record. Nationally, the median home price fell to $196,300, down 7.7% from a year ago.

Lawrence Yun, the group's economist, said the sales-price data are being distorted by foreclosed homes and other distressed sales, which are fueling price drops in certain neighborhoods, while the lack of available so-called jumbo mortgages for high-priced homes has resulted in fewer sales in upscale neighborhoods. The upshot is that the median price for a metro area may be falling, but the prices may very sharply "neighborhood by neighborhood," Mr. Yun said.

Still, high-end homes are clearly under some price pressure. Luxury builder Toll Brothers Inc., which reported preliminary second-quarter results on Tuesday, said its average home price dropped 17% to $590,000 from a year earlier and was down 7% from the previous quarter, partly because of increased incentives. Toll says it is offering most incentives on homes that were built for buyers who ultimately backed out of their contracts. The builder also said its average price was lower because it sold fewer homes in high-price markets such as California and Manhattan.

Toll says one of the biggest problems is that many buyers are putting down deposits but end up canceling because they fear they won't be able to sell their existing home. "They go to their friends and neighbors and say, 'We just bought a new home,' and everybody says 'What? Are you crazy? Prices are dropping,'" Chief Executive Robert Toll told analysts during a conference call.

There were some glimpses of improvement. The median price of existing single-family homes rose 3.2% to $280,000 in the Northeast in the first quarter, the NAR said. Mr. Toll reported a mixed bag in the Northeast, calling Putnam and Duchess counties in New York state and the state of Connecticut "B-plus" markets, while Massachusetts was a "D-minus" market.

Home prices fell 12.3% to $296,300 in the West and dropped 7.5% to $164,200 in the South. Yet Toll recently raised prices in a development in Naples, Fla., which had been one of the worst housing markets in the nation. "It gave us some happy times, especially considering that Naples was one of the worse markets," Mr. Toll said during the conference call.

Across most markets, however, Toll described the spring selling season as "quite weak," as buyers remained on the sidelines, despite improving housing affordability.

Toll's home-building revenue in the quarter ended April 30 fell 30% from the year-earlier period to $817.9 million. Net contracts for new homes fell 44% to 929 homes.

Analyst Ivy Zelman says even if Toll dropped its prices as much as other builders have, that might not generate many more sales in this high- end sector.

"Price is not the issue," Ms. Zelman said. "The problem is that many of Toll's buyers can't sell their existing homes. People are in a situation where they think 'I need to sell my house for $1 million and the best bid is $800,000.' They have negative equity, and they can't afford a down payment on a Toll Brother's home."

As home prices and sales decline, home builders have been writing down billions of dollars of land and inventory values on their books. Joel Rassman, the builder's chief financial officer, estimated second-quarter impairments would be in the range of $225 million to $375 million.

On the bright side, Toll reported about $1.2 billion in cash, which is expected to help the builder weather the downturn while credit tightens to buy land and pay for construction. Toll will release final second-quarter results June 3.


By: Michael Corkery
Wall Street Journal; May 14, 2008