The Boom Is—Is Not!—Over: The Great Real Estate Debate

When Holly Schiller bought a town house in Fort Lauderdale in the fall of 2004, she figured she would pocket a profit before the place was even finished. Schiller, 51, and her husband had already flipped several properties in Florida's sizzling market, and this one sounded sweet: three bedrooms, private elevator, designer appliances. Villa Medici, promised the builder, would be modeled after a "true Italian Tuscan village," featuring Mediterranean façades and a resort-style pool. "As with any 'limited edition,'" the pitch stressed, "demand always exceeds the supply."

Well, maybe not always. The housing market in parts of South Florida is melting faster than a snow cone on Miami Beach. Schiller's town house has languished on the market for 18 months. She has slashed the price by $75,000, to $565,000, offered a $2,500 bonus to the selling agent and at one point threw in a $2,500 store credit for home furnishings--all to no avail. "Buyers are extremely hesitant," says her broker, Rob Rose, adding that hundreds of similar properties are for sale, with similar gimmicks--from free Caribbean cruises to gym memberships (personal trainer included). Schiller is nervous. She's renting out another property at a loss, while trying to sell that one too, and has a deposit down on a second town house under construction. "They keep telling me 1,000 people a day move to Florida," she says. "I don't know where they're going. They're not buying."

The house party had to end eventually, even if sellers refuse to believe it. Many remain defiant to the point of delusion, demanding one more drink at the housing bar. Real estate bulls point out that the nation's median home price is still up 0.9% this year, to $231,000. But that stat is misleading. There's a stalemate between buyers and sellers: property owners are reluctant to cut prices, and buyers are patrolling from the sidelines, hoping for fire sales. "We've had sellers' markets for the last five years, and they're transitioning to buyers' markets," says David Lereah, chief economist for the National Association of Realtors (NAR). "Sales go down and prices follow. Sellers are stubborn, so there's a standoff." Lereah says he'll probably cut his forecast for price growth from 5% to 4% this year. It could be worse, but in certain mid-tier markets--like Cincinnati, Ohio; Dallas; Milwaukee, Wis.; Salt Lake City, Utah--prices didn't appreciate as quickly as in the hot zones, and aren't likely to fall as fast. In places like Phoenix, Ariz., Las Vegas and Los Angeles, epicenters of the boom, look out below.

Sales of existing homes nationwide are down 8.9% this year, including a 17% free fall in the West, according to the NAR. A year ago, 2.6 million units were on the market. Now there are 3.7 million, a 39% spike. Home builders, whose stock prices have tumbled, were late to cut production, a bad sign for new-home inventories, especially with mortgage rates higher than last year's levels. KB Home, a national builder, says its cancellation rate shot up to 37% in the second quarter, from 25% a year earlier. "People are making arguably the most significant economic decision in their life," says CEO Bruce Karatz. "They want to feel like they're being smart, and in some markets it's unclear whether it's smart to buy a home."