RG, I have not heard that. But, I would guess builders are so upside down themselves that they might negotiate anything to move inventory OFF their bhooks.

This is all very interesting but I have heard that builders are allowing you to renegotiate or compensate you if the sale of your existing home goes upside down. Any knowlege of this or sample letters?

The one big plus our region has, is a strong local economy. Unemployment is around 2.5% and household incomes are around $85,000-$100,000. But I think the draw down in inventory will have to come from interest rate declines from the Fed, making money cheap again. Otherwise we'll have to rely on the slow process of a population increase to fill all those high paying jobs in the area. Don't under estimate population growth. New residents have to live somewhere. And at the rate of 2.5/people per unit, an increase of 10,000 new residents could in theory draw down that inventory number. Although the high cost of units in Loudoun County will most likely create a bottom-up draw down in inventory. Where you first start seeing rental properties at full occupancy. Then Condo inventory declining. Then Townhouses. And last, Single Family homes.

Maybe thats a new chart for you Merv. A line graph of Condo, Townhomes, and Single Family unit inventories.

R. and Alby,
We may never know the true mix of the inventory glut. Investors that were slow getting out? Short term buyers trying to sell at a top? Sellers trying to get out before the designer mortgage is called? Move up? Move out? or, just testing the market and would sell at the right price?

What does appear happening is that the best homes at a reasonable price are selling. New construction selling is dismal. Also interesting to note is how Fairfax County seems to be fairing much better, even at higher average prices for older properties. Must be the commute thing.

Even with all the stagnation, I am surprised we have not seen a steeper average price decline. This may be due to sellers becoming more realistic now on setting their initial price.

At any rate, the market is still generally slow and, it may take another year or two to recover...not like 2003 to 2005, but more active than it is now. I hear colleagues say that "normal" might be a backlog of 3.5 to 4.5 months inventory.

It is intriguing to say the least.

Alby- I think you are correct about a lot of people finding themselves stuck in their current house. Almost everyone who bought with a small down payment over the last 2.5 years is stuck. There are still a lot of people who purchased their current home in 2004 or prior who could sell now without bringing money to the table. The cash-out refinance people excluded. The reluctance of home owners to list their price at the market clearing rate is what economists call sticky prices.

If conditions remain the same we may see prices decline faster in 2007 than 2006 as reflected by the statistics. The reason for this is that in 2006 the market began to include non-price incentives, closing costs, interest buy-downs, new roofs or countertops etc. These incentives are usually not reflected in statistical reporting. Merv is one of the only people I have seen actually adjusting his figures for these non-price incentives. NVAR, and Zillow don't. These seller concessions cushioned the price decline in 2006 but are already so commonplace that they will not provide a similar cushion in 2007.

So far 2007 is showing less inventory, fewer sales, and lower prices than a year ago. The market is still in hangover from the mania and we will probably never see activity like the 2003-2005 market again in our lifetimes. Inflation adjusted prices may never reach their 2005 highs either. The key ingredients in the mania was a seemingly limitless supply of credit from record low interest rates worldwide, a uniquely American affinity for Real Estate known as the "American Dream," and a naive belief that real estate prices only go up.

On my way to work today I heard a special on NPR about Ameriquest mortgage. The former employee claimed that they watched the movie Boiler Room as part of their training. He also said they created fake loan documentation in a department known as the "Art Department." He knew of many cases where fake 30-year fixed loan documents were created and laid on top of a 2-Year ARM document during closing to deceive the borrower into believing they were purchasing a traditional mortgage product. The loan then had a pre-payment pentalty of 6 months interest and usurious rates after the adustment. This expose is sickening http://www.npr.org/templates/story/story.php?storyId=10165859

The big news in the housing market will be how the mortgage mess unfolds. I think there will be a lot of pain over the next year or two. ALT-A products are currently following a similair although less severe decline as the subprime products. Eventually there may be some kind of bailout from congress, but I don't think it will happen anytime soon.

I can agree that high inventories and declining contracts would equal another gloomy year. Although each issue feeds the others. As inventories rise, prices must decline. Else you get left with a home that wont sell. And the reverse is true. As inventories decline, prices rise. If you don't adjust your price up, people will buy your house and make a nice profit off the seller's ignorance.

But I think what we have right now is StagHousingFlation. Inventories are rising, but prices aren't decline. Well they have declined, but not enough to eat up the inventory of homes. So we have to ask ourselves, why aren't prices falling even more? And the only reason I can think of, is the "Upside Down" factor on where people originally bought in at, verse the new market price their home might be worth.

If some spiffy economist crunched the numbers and said that a SF house which is currently averaging 180/days on the market going for $500,000, then you would have to figure that if a seller dropped their price from $500,000 to $400,000, that home might sell by COB. But can the seller who originally bought the home for $450,000 in 2005 drop the price to $400,000 in 2007? If they got in on one of those 5% down or less loans, once you minus commission from a 400k sale, that seller might owe $50k-$100k at closing. Obviously unless the homesale is an emergency because of work or a divorce or something, you'll unlikely see sellers continue to reduce their asking price.

Thats where the StagHousingFlation comes to play. Sellers can go lower on their asking price. Buyers cant afford the current asking prices. As such, the number of contract/sales declines because neither side can meet in the middle.

Maybe my crystal ball is cloudy, but I'd bet money that 2007 contracts and sales match 2006. And 2008 will be another repeat unless something gives. Because I doubt the handful of contract/sales will eat through this mountain of inventory. And with the Hub-Spoke type of road/job network we have in this region. As inventory declines in Fairfax and prices attempt to increase, buyers will just shift to Loudoun or Prince William. Which means that it might be best to look at an aggragate of all 3 or 4 counties to get a sense of a macro-economic shift in the area's real estate market.

But I say declining prices have constricted sellers on being able to drop their asking prices. And buyers just don't have the funds nor the friendly loan or interest rate environment anymore to afford these $500k on average homes.

Alby, see your original comment. I hope you don't mind that I added the correction. It is the power that I have.:)

The biggest factor driving prices is supply and demand. Listed home inventory is going up while contract activity is flat to declining in Loudoun, worse in Prince William.

I didn't catch the 60 minutes feature as I had my favorite "mother" out to dinner (Pam). I truly believe that the industry needs to transform itself into a fee based model where agents get paid for the work they do. Nothing wrong with that, is there? We should also have stricter qualification rules for people to get into this business. We simply have too many bad ones that don't know what they are doing.

I don't want to compete for business solely on price. Quality and fulfilling a fiduciary responsibility matters (fiduciary is a big word that most people don't understand). I will love to compete on the quality of service I provide! Consumer choice is a good thing. I give people choices on level of service at reasonable prices that pay me for time and expense. A novel idea.

Hahahah.. 30 day fixed. Should have said 30 year fixed.. :)

Note to self.. Proof read and correct typos before posting.. :)

When I read this article and came across the part about incentives builders are throwing in, it dawned on me, "Why don't builders just agreesively price their homes"?

If we all think about it, the slow down in home sales stems from sellers with Used or New homes trying pricing their property at 2005-2006 prices and then trying to throw in incentives to buyers to keep from bringing down their price. Yet obviously, buyers are smart and aren't falling for this tricks. The only resolution to this issue lowered asking prices or buyers who find their incomes going up. And the way I see it, Asking price reduction is the quickest solution

Now with New home builders, they can afford to get away with dropping their prices. All they have invested in the house are land + construction materials and labor. They would just break even and unload property to escape the tax-insurance carry costs. But I doubt that will happen unless the economy goes bellyup. Seems like they are just waiting for a return of the boom times. Existing home owners have more of an real dollar issue with dropping their asking price. For most, they would owe money at closing to cover the cost between the sale price and the mortgage owed amount. And with that totaling to thousands of dollars, sellers of existing homes are stuck. Or upside down if I recall in the industry.

Guess that leaves everybody stuck. Buyers can't afford the prices of these 05-06 priced homes. Sellers can't drop the prices or its a major fiancial loss. As such, everybody is hurting. But the people hurting the most are real estate agents, if you ask me. With only a 100-200 sales per month in Loudoun County at an average sale price of $500,000ish, thats only around $1500-$2000 per sale, per agent, once all is said and done. And thats if your lucky enough to get a sale. And once you subtract whatever ad costs I'm sure you guys encounter, at the end of the day, you've got enough money to buy Mac and Cheese and a bottle of water. Ouch...

Welp. All I can say is that I'm glad I didn't have to move last year. My wife and I wanted to sell, get a cheaper, but same sized house, future west in Winchester/Strasburg area so we could live in one income. Well with the housing decline in 2006, we couldn't sell for what we needed to sell at. As such, we pulled our home off the market in Sep 06, refinanced out of our 5/1ARM in Oct 06 to a 30 day Year Fixed, and consolidated all our debt an everything into one big Jumbo Loan. Thanks to the equity I had with buying my SF home back in 1999. Although we are back to a dual income lifestyle and paying for infant daycare, we are actually doing pretty good now. And with those nice big tax deductable interest payments going to the bank, next year our refund check from Uncle Sam will be very nice. Might be time to redo the kitchen and/or throw on a patio.

I still love keeping an eye on this website and watching the market. And throwing in my 2cents from time to time. Hope everybody caught that 60 Minutes show about discount agents last night. The days of 6% commissions might be gone soon. And all Sellers will jump for joy when that day comes and agents are tripping over each other to provide the lowest commission to earn your business.