After the Housing Boom

But last fall, when its owners put it on the market for $835,000, there were no takers. For nearly a year, the price sank; by July, when Stone and his wife saw it, it had fallen all the way to $619,000. Stone made a low-ball offer, feeling a little nervous. "We really wanted the house and didn't want to muck it up," says Stone, a college professor. But in Reno these days, buyers have to work pretty hard to sabotage a deal. A week later they signed a contract on the home for $590,000 — 30% below its original asking price.

The Stones' house could be a tombstone for the recent real estate boom. The long-anticipated slowdown has arrived with a stench of burnt brake pads, with even Federal Reserve Chairman Ben Bernanke saying that the housing sector is undergoing a "substantial correction." In 2005 home prices appreciated 12% nationally. This year the National Association of Realtors expects appreciation to reach just 2.8% — the lowest gain since 1992 and lower than the expected inflation rate. The impact is broader and deeper than many observers expected. Prices are falling fastest where the boom has been most extreme, on the coasts and in sunny destinations like Las Vegas and Florida. But outside the housing-hype spotlight, cities like Reno; Warwick, R.I.; and even Boise, Idaho, have experienced their own booms — and now their own fizzling downturns.

There's no shortage of reasons for the stall. For starters, the average rate on a 30-year fixed mortgage was 6.45% in September, up from a low of 5.28% in June 2003. That increase translates into a 13.5% jump in the size of a mortgage payment, pushing homes out of reach for some buyers. Homes in some markets have become so expensive relative to wages that the pool of buyers has shrunk. In Los Angeles, for example, only 19% of residents earn enough to afford a median-priced house; nationwide, that figure is 60%. And over the past 12 months, many real estate investors have pulled out of the same markets they helped inflate, leaving behind a massive glut of homes for sale. "When you read in the newspaper week after week that you can get $60,000 off a home, $100,000 off, no reasonable offer refused, buyers are going to be wary," says Bob Toll, CEO of home builder Toll Brothers.

It all adds up to promising times for bargain-hunting buyers, bulk purchases of Maalox for would-be sellers, and plenty of anxiety about where prices are headed. While no one knows for sure what will happen next, there are resources that can help you discern which way the market in your hometown is leaning — and we've got one of the best of them. For the fifth year in a row, we've worked with Ingo Winzer, president of Local Market Monitor, to come up with valuations for 152 markets. Drawing on more than 15 years of data, Winzer measures home-sale prices against local incomes to help determine whether a given market is overvalued, undervalued or fairly valued.

The most recent boom now looks most like a bubble in markets that have shown up year after year as the most overvalued — especially in Florida and California, which account for 24 of the top 25 overvalued spots in this year's survey. Now those markets may be falling back to earth. According to Winzer, any market that's more than 30% overvalued is due for a correction. In 2003 only eight markets fit that description; this year 37 do. The more overvalued the market, the more inevitable the correction. Naples, Fla., for example, climbed Icarus-like to the top of our list based on second-quarter data, and some agents say they are beginning to see homes selling for 20% below what they would have fetched a year ago.

Every market is different, of course — and a price correction can offer as much opportunity as heartbreak. To help you get a handle on your hometown, we've interviewed builders and brokers to find out what forces will shape the market. We've found tools to help you ferret out where prices are headed. And we'll help you figure out how to get the best deal on a home sale, no matter which side of the transaction you're on.