Tipping point for the US housing market

Man, that was some downright ugly data.

In July, existing home sales fell for the fifth straight month.

The number of homes on the market hit a 16-year high. Since June alone, supply has risen by 5%.

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The National Association of Realtors says if no more new homes were built, it would still take over 9 months to sell all the existing houses on the market.

To put it mildly, this is one tough environment. The word on the street is that buyers and sellers have been engaged in a fierce faceoff.

Buyers: These folks know they have the sellers over a barrel and are simply waiting for the price to come down.

Sellers: Those looking to sell still remember the astronomical prices that their neighbors received in 2005 and are refusing to budge.

Until now...

From $505,000 To $395,000

In July, the median home price in the U.S. slid by 0.6% to $228,900, compared with July 2006. It was the 12th straight month that home prices fell. In the second quarter, home prices fell 3.2% the biggest drop since the S&P began its Case/Shiller National Home Price Index in 1987 and news that sent the index to its lowest point ever.

And with prices dropping fast, the e-mail below tells the story of increasingly desperate sellers. In many previously hot real estate markets, investors bought houses and assumed they could then swiftly sell them for a quick n' easy profit.

But that isn't happening any more. Sellers are now stuck with houses and need to dump them fast, before the market drops any further. The e-mail below is from a Florida realtor to his client, letting him know of other similar houses on the market. The client's house was listed at $469,000.

Here are the details of your closest competition. There are 4 that are definitely 'Deals.'

#1: 06XX Old Ham: Your model: Was 505K now pre-foreclosure @ 395K OUCH!!!!

#2: 105XX Galleria: New on Market 5-bed Turquoise + Pool @ 425K

#3: 105XX Galleria: Turquoise Model @ 420K, dropped from 480K

#4: 104XX Galleria: Your Model @ 450K

The recipient of the e-mail, along with seller #4, probably expected to get around $450,000 for their home. But now, a seller headed toward foreclosure has taken them out at the knees by pricing $55,000 below the current market. And keep in mind... an interested buyer will smell the desperation like a shark smells a bleeding dolphin. Will the seller accept $375,000? What choice do they have? That drives the price of the other houses down even more.

The rest of the sellers in this community will have to wait until house #1 closes and hope that the market returns to more rational prices, otherwise they will have to come down even lower. But that could be a long time coming.

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This type of scenario is playing out in many parts of the country, too.

Think Real Estate Always Goes Up? Think Again...

Perhaps you're lucky enough to own a home in a strong market like Austin, TX or Asheville, NC. But if you're not, you can still sleep soundly, clinging onto the conventional wisdom that tells you to hang on for a few years if you don't have to sell and that real estate always goes up, right? Not so fast...

If you look at the history of real estate in this country, you'll be shocked at the numbers. According to Robert Shiller in his book 'Irrational Exuberance,' the real price increase from 1890 to 2004 was a paltry 0.4% per year. Sure, we've seen several price spikes, such as after World War II, the late 1970s and the current decade. But after the post-war rise in the late 1940s all the way through to the late 1970s, real estate prices barely budged.

Want To Sell? With Metro Areas Sinking, Do It Now

So what's the bottom line here? If you're in the home that you plan to be in for a long while, there's likely nothing to worry about. However, if you expect to sell your house in a couple of years 'when prices come back,' you may be out of luck.

As Shiller soberly states: 'The pullback in the U.S. residential real estate market is showing no signs of slowing down.' And in most parts of the country that had previously hot markets, sellers now have little choice but to slash prices if they want their house to move. Of the 20 U.S. metropolitan areas in the National Home Price Index, 17 showed a decline in their annual growth rates from May's figures.

But unfortunately, the real estate market isn't like the stock market, where you can employ sell-stops. So with house price declines likely to continue over the next few years, if you're thinking about selling, I suggest you try to do so now. If you wait for a couple of years, hoping for a price rebound, you'll be disappointed when you may have to settle for substantially less.

By Marc Lichtenfield, Senior Analyst, Mt. Vernon Research for the Smart Profits e-Report, www.smartprofitsreport.com