Hot potato!

The ever-escalating asking prices of homes reached a dangerous peak in 2006, resulting in something resembling a high-stakes version of the children’s game.

“At some point, somebody ends up with the hot potato,” said John Cuozzo, of Press-Cuozzo Realtors in Hamden.

Cuozzo’s analogy appears to be correct, as the number of single-family homes sold statewide in 2006 fell 14.01 percent to 37,337 versus 43,418 in 2005, according to statistics from The Warren Group, parent company of The Commercial Record. That is the lowest volume of sales for Connecticut since 1996, when 36,129 homes were sold.

Meanwhile, after four consecutive years of double-digit growth, the median sales price remained virtually flat, climbing just 0.73 percent to $275,000. It was the slowest annual growth since 1997, when the median sales price remained perfectly flat at zero percent growth.

“People who did not want to negotiate kept their houses on the market,” said Norman Krayem, president of the Connecticut Association of Realtors.

Though it finished flat for the year, the median sales price took a bit of a ride in 2006, as illustrated in month-over-month comparisons. While each of the months in the first and second quarters posted gains, the third quarter flattened out, and every month in the fourth quarter posted a loss compared to the same month’s performance in 2005.

And the rate of decline accelerated from October through December. According to The Warren Group, October, November and December finished at 2.39 percent, 2.46 percent and 3.64 percent, respectively, below the median sales prices for the same months in 2005.

“It was a year where – particularly in the beginning months – the Realtors were uncertain what the year would bring,” Cuozzo said. “As we saw the number of units was down, the sellers became more realistic as far as their expectations.”

Asking prices became “much more reflective of the actual value,” he said. So while the median sales price slipped in month-over-month comparisons in the fourth quarter, he added, the real decline was in the asking prices that had been “hyper-inflated.”

‘Eternal Optimists’

Whether the actual sales prices continue the decline of the fourth quarter remains to be seen. One indicator could be the inventory level, which, at least nationally, is 23 percent higher than last year, according to the National Association of Realtors.

“The concern that I have is, what is the overhang in the marketplace?” said Edward Deak, professor of economics at Fairfield University and the Connecticut forecast manager for the New England Economic Partnership. A large overhang – buyers who pulled their homes off the market last fall but plan to put them back on again in March – could further balloon an already large inventory, he said.

The market largely will depend on the overhang, the inventory and the interest rates, he said. “That [combination] really is going to tell the tale for 2007,” he said.

Deak’s prediction for 2007 is that the state’s median sales price will remain flat.

Krayem agreed. While “there’s no strong impetus for the prices to rise,” he noted, “the values are there.” That value, coupled with increasing material and labor costs, should keep market pressures from pushing the prices down, he said.

Sellers with “realistic expectations” on their prices will still be able to sell in the 2007 market, Krayem said. Determining a realistic price, he explained, includes finding the sales prices of similar homes that sold in the same market. Sellers also should look at how long similar properties have been on the market, he added.

“If it’s been on the market for more than six months, it’s overpriced,” Krayem said.

Before the market began to cool down in 2006, two to three months was the average length of time for a home to remain on the market, depending on the area, he said. Now properties are sitting for four to six months, he said.

The pattern in Connecticut parallels what has been happening nationally.

The nationwide inventory peaked in July 2006 at 3.86 million homes, according to National Association of Realtors spokesman Walter Molony. The total represented a 7.3-month supply, which is a measurement that approximates how long it would take to sell all the homes on the market at a given time.

Those figures were up from the end of 2005, when the inventory was 2.85 million, or a 5.1-month supply, Molony said. At the end of 2006, the inventory had fallen from its peak in July, but was still 23 percent higher than 2005, with 3.51 million homes, or a 6.8-month supply.

“We think the fourth quarter was likely the bottom of the housing cycle,” he said.

As for sales in 2007, Molony said he believes it will depend on the inventory and the local economy.

While Connecticut seems to have plenty of inventory to whittle down, there is at least one sign of a strengthening economy.

“The employment level in the state is pretty good right now,” Deak said. Numbers from the state Department of Labor peg the unemployment rate at 4.2 percent for December 2006, down from 4.6 percent from the prior year.

Krayem said he believes the leveling off of the prices will help peoples’ incomes – which had been outpaced by rising housing prices for the past few years – to “catch up.” That will help drive the market, he said.

Cuozzo voiced similar sentiments.

“I think what’s happening is that the demand will be there for 2007,” he said.

Cuozzo also predicted a flat year, noting that the median sales price could potentially climb 5 percent. Then, with a laugh, he added, “Realtors are eternal optimists.”

NAR’s data on the pending sales index, which tracks sales under contract and slated to close within two months, might provide a little fuel for that optimism.

“The pending sales index is up,” Molony said.