From The Wall Street Journal Online

During the real-estate boom and recent slowdown, the focus has been almost entirely on the price of homes. But land prices have taken an even wilder ride.

Residential lot prices in or near many metro areas across the country, including Boston, Washington, D.C., and Naples, Fla., have plummeted in the past year -- some as much as 29%. Big landowners are feeling the pain, too. According to Chicago-based Grubb & Ellis, a commercial brokerage, the median price of parcels averaging between 40 and 94 acres is $162,000 per acre year-to-date, 28% below the 2004 price.

The falling prices contradict the view that buying land is a safer bet than investing in bricks and mortar. In fact, lot prices have been far more volatile lately, buffeted by zoning laws, environmental regulations and other market forces. Meanwhile, adjusting for inflation, the cost to build a good-quality single-family house has remained relatively stable since 1980 at around $100 to $125 a square foot, according to Joseph Gyourko, a professor at the University of Pennsylvania's Wharton School. "Land is a risky investment," Mr. Gyourko says.

Not all markets are experiencing steep declines, according to data from multiple-listing services and brokers. In Houston, for example, where the oil and gas industry is going strong and creating new jobs, median lot prices grew 15.8% in the third quarter of 2006 compared with the same period last year, while median home prices rose 5.5%. In Portland, Ore., lot prices rose 28.9%, while home prices rose 10.62%. But overall, brokers and researchers say, there have been many more cool markets than hot ones in recent months.

In Boston, in the throes of its weakest housing market since the early '90s, the price of a lot fell 24.5% in the third quarter, while home prices fell 9.8%. In Naples, Fla., which was recently overrun and then abandoned by speculators, lot prices plummeted 28.7% in the same period, while home prices dropped 5.7%.

One reason land prices go to extremes is that the supply of lots is much less flexible than the supply of homes for sale, says Morris Davis, a University of Wisconsin housing economist. Builders can ramp up construction in hot areas or pull back in cool ones, fine-tuning the housing supply and mitigating pricing fluctuations. But the supply of "infill" lots in or near cities is relatively fixed, not counting the occasional teardown; that makes their prices more sensitive to market swings.

Deep Discounts

Although lot prices aren't tracked nationally by government agencies or trade groups, for-sale-by-owner Web site Owners.com says that overall, the median price for a typical 1.13-acre lot on the site was $99,500 in October, down 9.6% from a year ago. Meanwhile, the median U.S. home price in October was $221,000, down 3.5% during the same period -- a record year-over-year decline, according to the National Association of Realtors.

But in many areas, lot sellers have been discounting even more deeply, without success. In Columbus, Ohio, information-technology specialist Rick Field has been unable to sell his five-acre lot bordering a pond in a custom-home subdivision, even though he's lowered his price by 15%, to $117,900. Meanwhile, median home prices there have fallen just 3.3%. Mr. Field says he bought the property two years ago, intending to build himself a custom home, and then decided to buy an existing house elsewhere. "I didn't think [the lot] would be that hard to sell," he says. "It's very frustrating." In Cape Coral, Fla., computer programmer Lynn Oliver has cut the price of her 15,000- square-foot canal-front lot by 27%, to $309,000, although home prices have fallen just 8% over the past year. "The market is harsh," she says.

The market is equally difficult for developers, farmers and others who sell large tracts to big builders. Many of these builders are wiggling out of options to buy land and shedding lots by the thousands. Horsham, Pa.-based Toll Brothers, for instance, trimmed its land position by 6,500 lots in the fiscal third quarter over the previous quarter, a decline of 19%, and projects that it will shed an additional 10,000 lots in the year ahead. These tracts, generally too big to be of use to anyone but a large builder, are rarely sold off piecemeal and don't directly affect prices of infill lots.

In slumping markets, brokers say, land sellers may not be able to do much to make their listings more attractive to buyers, other than to cut prices, offer owner financing and closing-cost help, and make sure engineering studies, permits and utilities are in order. Still, carrying costs for land tend to be much lower than they are for houses, since there are no utilities to pay, driveways to shovel or faucets to fix (although there are taxes to pay). So unless there's some compelling reason to sell, lot owners are often in a better position to weather a down market. "You can just sit on it," says Naples real-estate agent Eydie Heller.

Land prices aren't falling everywhere in the country, of course. In hot markets like Houston, it's the buyers who are feeling the pinch. Michael Pearce wants to build a home with a big backyard so his two white Russian wolfhounds, Romeo and Rosalyn, have room to roam. The 34-year-old attorney has been shopping for property near his downtown workplace, but so far, the only lots he's been able to find in neighborhoods that he likes are about 5,000 square feet and cost between $200,000 and $300,000. That's more than he wanted to pay, for less space than he really wants. But since prices have doubled since he first started shopping a year ago, he plans to make an offer soon. "I feel under pressure to buy," he says.

No Room to Move

A strong economy isn't the only thing that's pushed up land prices in some markets. In Paradise Valley, a pricey suburb of Phoenix, rules that require houses to be on minimum lots of at least two acres have pushed land prices over the $1 million mark. And in Westchester County, N.Y., where most of the land is already built up and a quick commute to Manhattan is a major draw, it's difficult to find even a sliver of undeveloped property. Consequently, the vacant land market is doing markedly better than the housing market, says Briarcliff Manor, N.Y., broker Lisa Pazer.

For investors in markets like this with very few lots to flip, that leaves only one solution: create new ones by tearing down some old houses. Oddly enough, the resulting "recycled" empty lot can be more valuable than the lot was before with a house on it.

Westchester County contractor Joseph Forgione and his wife, Patricia, a real-estate broker, bought a ranch house on four acres in Purchase, N.Y., that once belonged to the father of actor Eddie Fisher. Before they purchased the property at a bankruptcy sale, it had been on the market for $2.4 million. But after the Forgiones bought it and tore down the house, offers began to roll in -- even though the new asking price was $3.7 million. In fact, interest has been so high that the Forgiones recently upped the price to $4.2 million, a 13.5% increase from last year. Home prices in the area have been essentially flat for the same period.

Clamoring to pay a premium for something that buyers could get more cheaply simply by buying an old place on a big lot and renting a bulldozer for a day seems counterintuitive, but Ms. Forgione thinks the explanation is, in part, psychological. An empty lot is a clean slate, so buyers project their grandest fantasies on it -- and that makes it seem more valuable. "As with everything else, new sells," she says.

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From The Wall Street Journal Online

The housing slump has been painful for millions of people who work in real estate or recently bought a house.

For Patrick Killelea, however, this year has been one long victory lap. Mr. Killelea, a 41-year-old software engineer, has long preached that it makes more economic sense to rent than buy homes. He recalls shouting "Wow!" when he heard about September's 9.7% drop in prices of new homes.

"I didn't want to gloat," he says. "But then again, maybe I did."

For years, Americans who refused to buy real estate at what they considered excessive prices were ribbed for failing to profit from one of the greatest booms in history. "Are You Missing the Real Estate Boom?" needled the title of a 2005 book by David Lereah, chief economist of the National Association of Realtors.

Now, with the housing market in a slump, renters who sat out the boom are finally getting some satisfaction.

Dean Baker, an economist, believes that the slump validates his decision to sell a two-bedroom condo in Washington's Adams Morgan neighborhood two years ago. Mr. Baker says he received $450,000 for the unit, which he had bought for just $160,000 in 1997. Since unloading the condo, he and his wife, Helene Jorgensen, also an economist, have been renting an apartment nearby for about $2,300 a month.

Mr. Baker concedes that he could have made an even bigger profit on the condo had he held it for another year or so but says it's impossible to time the market perfectly. While some economists argue that the housing slump is nearly over, Mr. Baker insists, "We're just at the beginning of it."

Mr. Baker has a history of forecasting bubbles early and often. He was quoted by newspapers in March 1997 -- three years before the tech-stock bubble burst -- as warning that equity prices were rising at an unsustainable pace.

That track record, he says, shields him from any snickering among his friends about his decision to cash out of real estate early. "Ever since I nailed the stock bubble, no one I know dares to razz me about my investment decisions," Mr. Baker says.

Rich Toscano did get some razzing from friends in early 2003 when he moved back to San Diego after a spell in Austin, Texas, and decided renting made more sense than buying. At that time, "it was universally agreed upon that real estate would always go up," Mr. Toscano says.

"I thought he was insane," says Mike Mannion, a friend who had met Mr. Toscano in the 1990s when they both worked for an information-technology consulting firm. The two friends spent hours debating over meals and coffee whether San Diego real estate was a good buy. In the end, Mr. Mannion rejected Mr. Toscano's warnings. Even though Mr. Mannion's wife, Christina, an architect, was nervous about the possibility of house prices falling, the couple plunged ahead and bought a three-bedroom house for about $580,000 in late 2003.

That proved a good buy. Home prices continued to soar in San Diego through 2004 and early 2005. But Mr. Mannion says he gradually began to be persuaded by Mr. Toscano's arguments about home prices soaring beyond many buyers' ability to pay. Last spring, Mr. Mannion and his wife put their house on the market and wound up selling it for $830,000. Now they rent and don't plan to buy until they're convinced the housing market has bottomed out. Before buying again, Mr. Mannion says, he will consult Mr. Toscano.

Of course, as even many hard-core renters acknowledge, homeownership has some big advantages, including tax deductions on mortgage interest, the possibility of gaining value over the long term and the security of knowing you won't be evicted by a capricious landlord. But some of today's renters say it has been a bad time to buy in the past few years, when speculators helped drive up prices at an unusually rapid clip.

David Jackson, a 26-year-old information-technology specialist, has been railing against the housing industry for two years -- ever since he made a vain attempt to find an affordable town house or condo in Silver Spring, Md. Unable to understand why prices were so high, he began researching the real-estate market and, he says, "came to the conclusion that there was a massive housing bubble." So Mr. Jackson decided to remain a renter. He pays $645 a month for part of a townhouse.

Now that the housing market is slumping, "I feel vindicated," Mr. Jackson says. "But I'm not looking forward to the coming recession." He believes that the housing slowdown and the effects of "a mountain of debt" on consumers will pull the entire economy into a slump.

Mr. Jackson blames what he calls "the housing industrial complex" in general and Mr. Lereah, the Realtors' economist, in particular. Since last year, Mr. Jackson has maintained a blog (davidlereahwatch.blogspot.com) devoted entirely to vilifying Mr. Lereah.

The blog recently offered a $75 cash prize for an essay containing "the most scathing criticism" of Mr. Lereah. Sample submission: "Dr. Lereah is a lying snake with the ethics of a dope-dealing pimp."

Mr. Lereah says he doesn't object to the blog. "There are people who believe it's the end of the world" for housing, he says. "They blame me for being positive."

Among all the defiant renters, few roar louder than Mr. Killelea, who pays $2,350 a month to rent a snug, two-bedroom craftsman house near Stanford University in Menlo Park, Calif. He figures it would cost him $7,000 a month in mortgage payments and taxes if he owned it.

Most mornings, he sits at a small pine table just off his kitchen and scans emails from acquaintances for any bad news that fits his world view. Before he heads off to work at a bank, he posts the dozen bleakest stories to his Web site -- patrick.net/housing/crash.html -- under the permanent headline, "U.S. Housing Crash Continues."

Almost anything grim will do. Economic assessments from Finnish newspapers pass the test. So does an ad from a Michigan home seller offering to cut his asking price $1,000 a day. One favorite posting consists of a spoof of a Realtor ad, showing a terrified woman screaming in front of a hideous house.

A native Midwesterner, Mr. Killelea worked in Chicago in the mid 1990s before moving to Silicon Valley in 1997 to take a job at Sun Microsystems Inc. He was excited about the $77,000 starting salary -- a 55% increase from his previous job -- until he discovered how much housing cost in California. He and his wife, Leah, rented for a few years in Palo Alto before deciding that they might find cheaper housing in Berkeley.

"We spent several months looking at open houses and bidding on properties," Mr. Killelea recalls. "We bid over the asking price, but never enough to win. On the last one, they were asking $395,000 and we bid $500,000. We got a call afterward, asking us if we wanted to raise our bid. We said, 'No.' We thought that was enough. It turned out that the house sold for $530,000."

After losing that Berkeley home, Mr. Killelea told his wife they were calling off the home-buying search. She says she wasn't thrilled. But they moved to a new rental -- their fourth in five years -- and nestled their two children into an upstairs bedroom with bunk beds.

Even though prices have come down a bit in parts of California, Mr. Killelea vows to resist the pressure to buy. Recently he mused on his Web site about why more people don't follow his example. "I get the feeling many wives are pressuring the husbands to buy," he wrote. "I know it's not politically correct to say so, but I think a lot of irrational purchases are driven by female nesting instincts."

Mr. Killelea says his wife has been "very understanding" about his refusal to buy at today's prices: "She can do the math, too."

But Ms. Killelea seems more open to the idea of homeownership. "We haven't really talked yet about when we'd want to start looking again," she says. "I think we're going to need to discuss that."

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From The Wall Street Journal Online

New home-building activity in the U.S. resumed its decline in October, tumbling to its lowest level in six years as builders dealt with bloated inventories of unsold property.

Housing starts decreased by 14.6% to a seasonally adjusted 1.486 million annual rate, the Commerce Department said Friday. Building permits, an indicator of future building activity, fell a ninth consecutive time.

The government also lowered its original estimate for September starts, a number some economists considered a fluke. Construction rose 4.9% to 1.740 million in September, revised from an originally reported 5.9% climb to 1.772 million. Starts fell 5.7% in August, 4% during July, and 6.1% in June. Construction rose 6.6% in May.

Economists had expected a less-severe drop in October. The median estimate of 22 economists surveyed by Dow Jones Newswires was a 5.6% fall to a 1.672 million annual rate. The 14.6% decline was the largest since 16.1% in March 2005, and it carried starts to their lowest since 1.463 million in July 2000.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the housing data were a "sharp poke in the eye" for those who had argued that September's jump in housing starts was a sign that the housing-market slump was nearly over.

The slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades had powered a housing boom that pushed sales of both new and existing homes to five consecutive records.

In a sign that starts will likely continue to fall, October building permits dropped 6.3% to an annual rate of 1.535 million; the last month permits rose was January. Economists expected permits would be up by 0.1% to 1.640 million. Permits decreased a revised 5.2% last month to 1.638 million, compared with an earlier estimated 6.3% drop to 1.619 million.

Despite the worse-than-expected drop in the headline number, Mr. Shepherdson sees a rebound in the next month, based on the less-volatile building-permits data. "The key point though," Mr. Shepherdson wrote in a note to clients, "is that housing is set to be a big drag on fourth-quarter gross domestic product, more than in the third quarter's -1.1%. It's not over."

The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate. Housing is expected to continue acting as a drag over the next year but analysts believe the adverse effects of falling sales and construction cutbacks will not be enough to pull the country into a recession.

And, even as there were signs that the housing slump isn't over, there were some glimmers of hope that the slide may be beginning to level off. The monthly survey of builder sentiment edged up slightly in early November following another small increase in October. It marked the first back-to-back improvements in builder sentiment since June 2005.

Regionally, housing starts fell 11.7% to 242,000 units in the Midwest, 26.4% to 705,000 in the South, and 2.1% to 374,000 units in the West. The only region showing an increase in building activity was the Northeast, where starts jumped 31% to 165,000 units.

Breaking down the rate of 1.486 million overall U.S. starts in October, single-family housing fell 15.9% to 1.177 million units. Construction of housing with two or more units decreased by 9.1% to 309,000; within that category, groundbreakings of homes with five or more units -- or multifamily -- fell 14.7% to 266,000 units.

An estimated 131,300 houses were actually started in October based on figures unadjusted for seasonal factors. An estimated 130,400 building permits were issued last month, also based on unadjusted figures.

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