Handsome homes stand shoulder to shoulder. Skateboarding tweens clickety-clack along the sidewalk. Parents greet children exiting big yellow school buses. In the backdrop are rows of corn, green hilltops and blue sky.
But anxiety lurks behind the panel doors with polished brass knobs.
"For sale" signs are prominent.
Forget curb appeal. Grass is knee-high in front of some vacant houses lingering on the market, including one with a sheriff's sale notice taped to a window.
Worst of all, many of the residents bought the homes new and paid premium prices in 2005 and 2006 when real estate was peaking. They wonder if their homes are worth what they paid as prices slip.
"You wake up one morning and think "Oh Lord, look at this mess,"' said Anthonis Lewis, who moved to the neighborhood in 2005. "What did I get myself into?"
The scene underscores the new Lehigh Valley housing market, where an abundance of houses for sale and a lack of buyers to snatch them up is dragging prices down, eroding years of go-go gains.
Things will get worse before they get better, economists believe.
One Lehigh Valley economy expert predicts the average house price will bottom out at about $200,000 some time next year. That's a 19 percent drop from their peak sale price of $246,000 in July 2007, and a 12 percent drop from existing prices.
And when the market stabilizes, it won't snap back to double-digit gains. More modest price appreciation is expected, meaning it could be well into the next decade before housing recovers lost ground.
"For 95 percent of owners who are sitting in their homes and paying their mortgages on time, this is just a paper loss," said Kamran Afshar, who predicted the price decline. "But if, for any reason, you have to tap the asset that is your house or you have to move or have to sell, this is a disastrous time."
Market craters
It's an abrupt change for the Lehigh Valley housing market. Sales volume began slowing more than two years ago. But until this summer, prices held fairly steady, which softened the pain.
Now house prices are dropping significantly, which can send shock waves through the economy. Home building slows down, which hurts the construction industry and all of the brokerages and insurance outfits that benefit when houses are sold. Household wealth diminishes, delivering a slap to consumer confidence. That can hurt the retail sector and keep potential home buyers on the sidelines. Homeowners who can't afford to pay their mortgages and are unable to sell their homes get pushed into foreclosure, which throws the prices further downward.
"There are several impacts of falling housing prices," said Ryan Sweet, an economist at Moody's Economy.com who predicts Lehigh Valley house prices will drop by at least 10 percent in the next year. "People used their homes as ATMs. They pulled out equity to increase consumption, pay down debt, buy vehicles and make home improvements. It provided a boost to overall discretionary spending. When prices are declining, their ability to extract this money is eliminated."
The local market reflects the turmoil of the national economy. President Bush has proposed a massive government-funded bailout of the financial system, which is crumbling under the weight of bad mortgages issued during the housing boom. The stock market is volatile, in a one-step-forward, two-steps-back pattern while lawmakers argue about whether and how government should intervene.
To be sure, the Lehigh Valley housing market is faring better than parts of California, Florida and Nevada, where price declines have been precipitous and foreclosures much more prevalent. Nationally, home prices dropped 9.5 percent in August compared to the same month a year ago. In the Valley, the August average price was $228,000, down 5.8 percent from a year ago.
Neighborhood woes
But that offers little consolation to residents in The Hills at Lockridge, where houses are lingering on the market and falling home prices are the talk of the neighborhood.
The woes are more pronounced in the Valley's newer subdivisions. Older neighborhoods have a broader mix of residents who purchased at different times and have varying levels of equity. In those neighborhoods, people who purchased in the past couple of years or who tapped equity at the height of the market could feel the pain, but they are not so heavily concentrated.
In new neighborhoods, large groups of people who purchased at peak housing prices are clustered and collectively watching their equity melt away.
Tom Hearn purchased his home 31/2 years ago. He noticed officials from the sheriff's department cruising the neighborhood to issue foreclosure notices this summer, and now he monitors foreclosures on the Internet.
With the economy shaky and homes losing value, his family has curbed spending and is keeping out of credit card debt, he said.
"I was fortunate enough to buy this house," Hearn said, sitting in a rocking chair on his front porch. "That's where most of my money is, the equity in this house."
Jon Dech sat on his front stoop with twin daughters Sophie and Olivia, reflecting on how much the market has changed since he purchased his home three years ago, when buying a home seemed a no-lose proposition.
"When we put our deposit down in the summer of 2005, they had waiting lists of people picking out the end lots and the cul-de-sacs," said Dech, who worked in the mortgage industry for 20 years and recently switched careers because of the turmoil and now works in the petroleum pipeline industry. "There was a lot of competition. Now it's pretty much the opposite."
Craig McBean moved from Queens, N.Y., three years ago, seeking a better neighborhood and schools for his four children. He's seen some homes empty out and no one move in, and he fears a ghost town could develop if the economy continues to erode.
"We tried to refinance to get a better rate earlier this year and found out we lost $20,000 to $30,000 on the value of our home," McBean said. "That was a big surprise. I'd love to see the economy get back on track and the housing market pick up. I'd love to see the value of my house go back to where it was when we bought it."
Simple test
If you're thinking of buying a house, consider this scenario. You purchase a house for $200,000 with a $160,000 loan and a $40,000 down payment. If the home loses 10 percent of its value within the next year, almost all of that loss comes out of your pocket because the loan amount didn't change, and you now have about $20,000 equity in a home worth $180,000. If home prices stay flat for another year, as expected, and then appreciate at an average annual rate of 3 percent, it'll take you about six years to rebuild your equity to the day you purchased, not accounting for inflation.
If you have to sell before then, you're taking a loss.
Real estate brokers are quick to point out the plus sides of the housing market and the pitfalls of waiting it out if you're ready to buy. A robust inventory and low mortgage rates make it a great time for prospective buyers to shop around and find good deals, they say. Buyers who wait for prices to drop further risk entering the market at higher interest rates or facing more competition for the home of their choice, which could end up costing them in the long run, they say.
"The typical home buyer is not looking to flip their property in a year," said Brad Patt, senior vice president for Prudential Patt, White Real Estate. "There is nothing to fear. The market will return."
Mark Molchany, president of the Lehigh Valley Association of Realtors, said there is pent-up demand. If Congress approves an adequate government bailout that boosts consumer confidence, he thinks the local housing market could rebound sooner than 2009.
"Consumer confidence is low," he said. "I think there are a lot of buyers who are ready to buy but they're just not doing it because they're worried about the economy."
Two factors that could pull Lehigh Valley housing prices down further are the large inventory of newly built houses and the rising rate of foreclosures.
Home builders looking to unload inventory can offer incentives that homeowners can't match. Forget granite countertops and trim upgrades. Home builders are offering $25,000 cash back or slashing prices to attract buyers. Some are even offering buyers' agents a higher commission to steer customers their way.
"Home builders have this unsold inventory and they are ramping up incentives to unload," said Steve Thode, a finance professor and director of the Murray H. Goodman Center for Real Estate Studies at Lehigh University. "That affects existing home sale prices. We're not going to see a recovery until we get that unsold inventory down. My best estimate is we're about a year away from recovery. We'll be well into 2009 before we see the bottom of this."
Loren Keim , president of Century 21 Keim Realtors in Allentown, said new four-bedroom, 21/2-bath houses are available in some Upper Macungie Township subdivisions for just under $300,000, and the builders are offering $25,000 cash back to entice buyers.
"If you happen to have bought a similar home for $315,000 and you put in $5,000 in upgrades, effectively you're at a $45,000 disadvantage against that new construction," Keim said. "It's going to make it impossible for you to sell."
Foreclosure trend
The situation is fueling a foreclosure spike in the Lehigh Valley. In a hot housing market, distressed homeowners can usually avoid foreclosure by selling their homes and paying off their mortgages. But when the housing market tanks, not everyone can stay in their homes waiting for a turnaround. Job losses, divorces and work transfers are just some of the situations that can force people to sell at inopportune times. If they can't find a buyer and can't refinance or tap equity to buy time, foreclosure looms.
The Lehigh Valley foreclosure rate remains low compared to the national average. But it is up significantly from last year and the upward trend is expected to continue. There were 108 foreclosure notices issued in the Lehigh Valley in August, up 114 percent from the same month a year ago, according to RealtyTrac, which monitors foreclosures nationwide.
The root of the problem is adjustable rate mortgages. Many buyers were enticed by low teaser rates that made their initial monthly payments seem affordable. Even though high payments loomed, many buyers expected their homes to quickly gain value, enabling them to refinance with more favorable terms before their higher monthly payments began, said Daren Blomquist, marketing communications manager with RealtyTrac.
"Some of the areas that are rife with foreclosures are newer developments where people bought right at the top of the market using more dangerous loans," he said. "It's a vicious cycle. More foreclosures puts pressure on home prices to go down, which could cause problems for other homeowners."
That potential scenario frightens Lewis, the resident of The Hills at Lockridge. She stood in her driveway pointing up a hill where two vacant houses have been on the market for months.
"That's what neighbors talk about all the time, the value of the houses," she said. "We don't know what's going to happen."
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