Where the Buyers Aren't: Prices
Ebb in Some Waterfront Locations

As real-estate prices surged across most of America, some of the biggest gains swept coastal resorts. Now there are signs the tide has finally turned.

In Naples, Fla. -- a year ago the fastest-appreciating community in the country -- prices slipped 1% in February, says the Florida Association of Realtors. In Ocean City, N.J., the median price fell 7% in March from a year before, according to an estimate by the Ocean City Board of Realtors. Most other places nationwide have yet to show a fall in median prices, which typically lag a sales slowdown by several months.

Sellers in Ocean City, a densely populated barrier island with a long boardwalk and broad beaches, have cut prices as their properties languish. Bill Beible had listed his four-bedroom, two-bath condominium for $1.35 million last spring. Mr. Beible, a manufacturing executive who bought the place in 2003 for $725,000, admits the price was a bit steep, but other homes like his had sold in a matter of days.

Mr. Beible now says he aimed too high. After getting no takers, he cut the price to $1.25 million. A buyer materialized, but asked for concessions -- and then backed out. When Mr. Beible relisted the condo late last year he dropped the price to $1.195 million, but didn't get any offers. So last week he cut again, to $1.059 million -- down 28% from his initial price. "I wish I had priced it lower from the beginning," he says.

Another sign of skittishness in vacation communities: Some real-estate agents have started cutting prices on their own homes. Broker John Melton listed his 10-year-old house in Bend, Ore., for $549,000 in December; now he's lowered the price to $524,000. In Naples, Al Lazzaro cut the price twice on his four-bedroom lakeside house, to $699,000 from $747,000, after getting dozens of email blasts every day from fellow agents shouting, "owner motivated."

Similarly, agents who once simply wrote up orders are quietly cutting commissions or fronting money for home repairs, closing costs or even sewer permits. The dearth of buyers means sellers must consider every offer, even if it gives them little profit, says agent Jim Kalweit in the Cape Cod town of Hyannis, Mass. "Offers that would have been an insult a year ago are now being accepted," he says.

The slowdown means more houses are piling up on the market. On Cape Cod, the total number of homes for sale has risen 62% since this time last year; in some places in Southwest Florida, home listings are up as much as 75%, say local real estate boards. And in many coastal communities the number of single-family home sales is down dramatically from last year. Sales have fallen by nearly half in Sarasota, Fla., one-third on Cape Cod and nearly 15% in Newport Coast, Calif.

Meanwhile, a recent quarterly survey of 299 housing markets found that many of the country's most popular vacation-home communities are also among the most overvalued. The analysis, done jointly by research company Global Insight of Boston and financial holding company National City of Cleveland, looked at home prices, household income, population density and other factors from 1985 to 2005. The survey says markets that are 30% or more out of line with historic figures are extremely overvalued and ripe for price corrections. Among them are Naples, Ocean City, Bend, Santa Barbara, Calif., and Barnstable, Mass., on Cape Cod.

All this is a seismic shift from just last year, when some consumers were raiding their home equity to grab a beach or mountain place. Investors and second-home buyers purchased a record 3.34 million homes last year, up 16% over 2004, according to the National Association of Realtors. (Investors made up three out of four of these purchases.) But while boomers in their peak earning years may still buy homes for vacations or eventual retirement, the investor segment is expected to shrink, the trade group says.

For renters, a softening vacation-home market could mean more properties to consider and negotiable rates. That's because some owners who had hoped to sell may instead rent out this summer season. "You can certainly play the price game this year," says Bill Rompf, spokesman for RentalHouses.com, a Louisville, Ky., online listing site. But, he adds, don't expect deep discounts in upscale places, where vacationers are more focused on a property's distance to the beach and golf course than on price.

Of course, buyers also should benefit. But the fact that some sellers are trimming prices has made some buyers wary. Nancy Rawls, a hospital-benefits coordinator, is looking to buy a two-bedroom vacation condo in Pensacola, Fla., but thinks prices may continue to soften through the summer as inventory levels build. "You have to sit, wait and watch," she says.

Here's a look at five vacation markets where prices show signs of cresting.

Naples, Fla.

SUMMER OUTLOOK: Now that the snowbirds have flown back North, price-cutting could pick up -- especially as hurricane season nears.

The economy of this tony Southwest Florida city relies heavily on real-estate sales, especially to out-of-staters. Realty ads are ubiquitous, inflating the size of the local newspaper; agents even slip listing sheets under the glass tabletops at a popular ice cream shop.

Earlier in the decade, a three-bedroom condo near the beach went for less than $300,000. Such prices attracted investors, pushing up the market rapidly. That's not a problem for the truly rich, who are still buying properties in the $10-million-plus range (five have sold since January), but it's creating an affordable-housing crisis for many year-round residents, who make a median income of $66,000. The median single-family home price hit $492,000 in February, the highest in the state, says the Florida Association of Realtors.

Now Naples tops the Global Insight/National City list as the country's most overvalued market. Single-family home sales are down by one-third since this time last year. Inventory levels have reached a 21-month supply -- in other words, if no other homes came on the market, it would take that long for all of those currently listed to sell. That's about three times the supply at this time last year, and about four times the current inventory level nationwide.

"We're flooded with inventory," says Tripp Champion, a Naples real-estate agent. He represents a German buyer who's just slashed the price of his four-bedroom mansion three blocks from the beach by 15%, to $3.3 million.

For buyers, the market is opening up. Susan and Brian Lewis of Ridgewood, N.J., have been looking for a Naples vacation place in the $500,000 range for two years. But they hadn't liked the selection, which tended to be older places that need updating. "I always felt like I was back in my mom's kitchen," says Ms. Lewis. Now, agents are showing the couple newer and larger places -- though the Lewises plan to wait until summer to buy, since they expect prices to fall further. "We're sitting pretty now," she says.

Santa Barbara, Calif.

SUMMER OUTLOOK: Don't expect bargains at the top of the market, but prices and rents for more modest homes are already falling.

With Pacific Ocean views from its hillside homes, Santa Barbara has long attracted celebrity homeowners, from Jane Fonda to Michael Jackson. And its continuing popularity with the rich and famous has helped insulate sales at the upper end. Ninety-three single-family homes sold in March, up 21% from the same month last year, according to the Santa Barbara Multiple Listing Service, and prices at the top of the market continue to rise. Agent Randy Solakian, who deals with some of the region's most-expensive homes, says the big prices some of these homes reached in previous years -- a few topped $40 million -- have created overblown expectations. "Sellers have become intoxicated by all the zeroes," he says.

But for most shoppers, Santa Barbara's median price of $1.19 million as of March, one of the highest in the country, is daunting. The lack of more-affordable choices had pushed inventory levels up 9% by that month, and overall sales, including condos, down 3%.

The market for properties under $5 million is weakening; agent Nell Eakin says the price of one of her listings was just reduced by $315,000, to $2.5 million. Within walking distance of a country club and surrounded by gardens and fountains, the Spanish-style home has been on the market only a little more than a month. Landlords are discounting, too. Erik Eyman, a computer technician, couldn't snag a tenant for his three-bedroom ocean-view house, which he estimates is worth about $1.7 million, until he lowered the monthly rent to $2,900 from $3,500. He says that over the last few months, both selling prices and rents in Santa Barbara had become "ridiculous, expensive, outrageous -- but they're softening now."

Bend, Ore.

SUMMER OUTLOOK: Prices will sag on the upper end, but not for homes under $300,000, which are scarce.

Located in the center of the state, Bend doesn't attract beach-goers. Rather, second-home buyers come to enjoy skiing in the Cascade Mountains, which loom over the town, rafting in the river that runs through Bend, playing on one of more than two dozen golf courses or hiking in nearby parks. Relatively low home prices are a draw, too, making Bend the sixth-fastest-growing metropolitan region in the United States, according to U.S. Census estimates released last September.

Prices have been rocketing, though, jumping 32% to a median in March of $327,500 from a year earlier. "Prices have come up so dramatically there's a real problem with affordability," says broker Jim Floyd. The number of single-family homes sold last month fell 28% from a year earlier, to 177, according to the Multiple Listing Service of Central Oregon -- possibly an early warning of cooler conditions. Sellers are getting the message. On one street in Bend, a seller dropped his asking price by $40,000, to $1.359 million, after less than two months on the market; down the street, another house has gone to $998,000 from $1.033 million.

Ocean City, N.J.

SUMMER OUTLOOK: High inventory levels should soften prices. But rentals are strong, so some owners will try to wait out the slump.

Like much of the Jersey Shore, Ocean City was ignored by New York vacation buyers until the early 2000s, when exploding prices in the Hamptons finally persuaded buyers to take a look. Suddenly, prices soared and supply dried up. "Things went through the roof," says Nicholas Marotta, president of the Ocean City Board of Realtors, adding that "we all knew it was going to come to an end."

Both single-family and condominium sales in March fell by two-thirds from a year earlier. Meanwhile, the supply of homes on the market mushroomed. The inventory of single-family homes has more than doubled, while the condo inventory nearly tripled.

Broker Mark Grimes says many sellers are trying to unload properties they bought only two years ago, when prices were rising rapidly. "Now they're going the other way, and they're thinking 'This could get worse,'" he says. Some sellers aren't waiting for that to happen, and are cutting prices drastically -- last week, one of Mr. Grimes's clients dropped his listing 20% to $1.995 million. Others, like respiratory therapist Gabe Dunn, whose three-bedroom furnished condo is on the market for $499,000 -- $110,000 more than he paid last June -- are advertising for summer rentals as a hedge against a softening market. "Sellers have to be flexible," he says.

Barnstable, Mass.

SUMMER OUTLOOK: Relative bargains will abound for buyers, especially in condos.

Three years ago, Cape Cod was hot. But the popular peninsula has been stagnant for more than a year, and things don't seem to be getting any better. In Barnstable, in the mid-Cape, the median single-family home price is nearly unchanged from last year at $360,000. The number of single-family home sales is down almost 7% from last year. Condo prices have fallen 3.8%, to $193,640, according to the Cape Cod & Islands Multiple Listing Service.

Lisa Burgess, a Barnstable agent, says that while sellers are starting to cut prices, so far they've not come down enough to jump-start the market. "Buyers are still sitting on the fence," she says.

The slump has had a dampening effect on would-be home flippers. Seventy-eight-year old Barbara Fleming, a retired receptionist, got into the game late, nabbing an 18th century home for $380,000 during the beach-buying rush three years ago. She lived in the home while spending more than $100,000 for improvements, including replacing the roof, replastering the walls, refinishing the floors and refurbishing the kitchen. Last year, she put it on the market for $689,000, hoping to recoup her costs and make enough profit to buy another fixer-upper. She got an offer, but the deal fell through when the market cooled so much that the would-be buyers couldn't sell their own place.

Though Ms. Fleming has reduced her asking price twice -- it's now at $650,000 -- she says she's resigned to the possibility that no one might meet it.

-- Amir Efrati contributed to this article.

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