U.S. housing prices are drooping and buyers are waiting

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NEW YORK (AP) - Low-price bidders, finicky buyers and
cancellations are now the rule in once-hot housing markets.
Rising interest rates and sky-high home prices have cooled real
estate investment, "particularly in high-end markets in some
juiced-up parts of the United States where speculation was most
rampant," said Mark Zandi, chief economist at Moody's Economy.com.
The record low interest rates and speculators that

NEW YORK (AP) - Low-price bidders, finicky buyers and

cancellations are now the rule in once-hot housing markets.

Rising interest rates and sky-high home prices have cooled real

estate investment, "particularly in high-end markets in some

juiced-up parts of the United States where speculation was most

rampant," said Mark Zandi, chief economist at Moody's Economy.com.

The record low interest rates and speculators that once drove

prices higher are gone. Observers expect housing prices to stagnate

or decline slightly, though a steep crash for housing prices is

unlikely. As the market slows, both builders and buyers are getting

used to the changes.

On a recent conference call, Ara K. Hovnanian, the president and

chief executive officer of homebuilder Hovnanian Enterprises Inc.

said that real estate investors "have largely pulled out."

"Investors were a bigger part of the market than many thought,

including ourselves," said Hovnanian, whose company builds

primarily in the Northeast. Speculators - or flippers as they are

called - are not only not buying new properties, they are selling

what they already own, adding to the record number of homes already

on the market.

Stocks in the sector have fallen dramatically. Hovnanian, for

instance, is trading near $29 a share, down from its 52-week high

of $73.40. Rival Toll Brothers Inc. trades around $26 a share, down

from a 52-week high of $58.67.

Wachovia last week cut its rating on builders including Pulte

Homes Inc., KB Home and DR Horton Inc., citing a sharper, more rapid

downturn in the market than expected.

Developers have started canceling projects. Plans were scrapped

last week for a 4,400-unit Las Vegas condo resort complex that had

been backed by actor George Clooney and nightclub owner Rande

Gerber. The development company for the project said rising

construction costs and slow sales forced it to rethink the plan.

With land prices falling in some areas, Hovnanian has walked

away from about $5.6 million of deposits on land

parcels it had options to buy, lopping 5 cents a share off the

company's second-quarter earnings.

Buyers in some cooling markets know they are in the driver's

seat.

Rachel Moehl, a real estate agent with Weichert Realtors in

Jersey City, New Jersey, said she almost saw a deal for a

three-bedroom condo fall apart over what proved to be a $400

problem - moisture between window panes.

The buyers "were saying the week before the closing, 'We don't

really love the apartment. We're ready to cancel the deal over the

windows,"' she said. The seller gave them a $400 credit.

Other agents say clients are putting in bids well below the

sellers' asking prices, or simply waiting.

"Home prices have risen to where buyers can't afford to buy,"

said Keith Gumbinger vice president at HSH Associates, which

publishes consumer loan information.

The national median existing home price was $223,000

in April, according to the National Association of Realtors. While

that was a 4.2 percent increase from April 2005, the organization

predicts that prices this year will rise only 0.8 percent.

Others aren't so sure they will rise at all.

There was a 4-month supply of unsold homes on the market in

April 2004; it rose to 5.8 months in April 2006, according to the

Department of Commerce.

In suburban Philadelphia, where the inventory of unsold homes

has soared, Zandi asked an agent months ago how anyone could get a

mortgage for a home listed at $3.2 million.

"They were almost snooty," he said. "The girl said, 'People

who buy these homes buy with cash."' The house is still on the

market, now listed at $2.8 million.

Part of the backlog is 128,000 unsold new homes, the highest

level in history, said Mario Ricchio, housing analyst at Zacks

Investment Research Inc.

"Homebuilders may not be able to push all this supply through

the market," he said.

Contract signings for new homes are down sharply and

cancellations are up.

"It's a more difficult market and our salespeople are no longer

just taking orders; they have to sell," Hovnanian said on the

call.

Most observers say housing prices will only slide dramatically

if the Federal Reserve continues to raise interest rates.

The Fed's target short-term rate is currently 5 percent. If it

passes 7 percent, "then things get very tricky," Zandi said.

"Many home owners will have trouble making payments. We'll see

significant mortgage credit problems develop."

By the end of 2004, 35 percent of buyers had adjustable-rate

loans, up from 18 percent the previous year, according to the

Federal Housing Finance Board's interest rate survey.

Those buyers could see a steep increase in their monthly

payments if interest rates spike. That, in turn, could cause

increased defaults and foreclosure sales at low prices.

"The higher mortgage payment may lead some overstretched owners

to default on payments, adding supply to an already glutted

market," said Ricchio at Zacks Investment Research.

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