Those who do sell their homes are still making money on them. But in today's Coachella Valley real estate reality, home price appreciation, on a year-over-year basis, has slowed into the single digits - most recently at about 8.1 percent in August, down from 19.7 percent in August 2005 and the seller-heyday 37 percent of July 2004, according to DataQuick Information Systems.

Multiple Listing Service data from the California Desert Association of Realtors indicates that for the first eight months of 2006, the median price of $380,000 was an increase of 1.3 percent from the same year-earlier period. In 2005, the appreciation rate for the same period was around 20 percent.

Unlike what's happening in places like San Diego, valley prices year-over-year are not yet falling - with the monthly median sales price still hovering just below $390,000. But sales counts are down more than 40 percent from a year ago, according to DataQuick. The current market means buyers, sellers and investors are all having to readjust their expectations.

"I have to tell sellers not to price their house up too high, but to price it at what they're willing to accept and negotiate from there if they have to," said Rocio Flores, a real estate agent with Century 21 D'Oro in Indio. "There's a ton of inventory out there, especially with the new building still going on."

The speculator effect

Many of the homes constructed and purchased in response to the frenzied 2004 market - often by nonresident investors - are now sitting empty, frequently being offered up as rental units. And at some of the larger subdivisions, homes continue to be built, adding yet more competition for investors still trying to sell properties purchased during the boom of 2004-05.

"It's a much more competitive market out there right now, and builders are having to do things to entice buyers," said Fred Bell, executive director of the Southern California Building Industry Association's Desert Chapter. In response, some new-home builders are throwing in free pools, casitas and major price breaks to move their product. And instead of seeing bidders line up, some resale-home sellers are now having to drop prices by tens of thousands of dollars, as the sellers' market of two years ago moves in favor of buyers.

Even though their true impact has never been calculated, experts agree that much of the mass buying and building activity of that frenzied period of 2004 was spurred by speculators. As occurred elsewhere in California, speculative buyers - many of them not residents of the valley and with no plans to live here - often purchased large quantities of resale or new-construction homes, aiming to "flip" them quickly for a profit. With that party long over, the rest of the valley market is feeling the hangover - though the local market still hasn't been hit as hard as places like San Diego.

"I'm sure there were a lot of speculators who bought here in 2004 and 2005 but decided, 'Hey it's been a good run,' and they're not in the market anymore," said Chapman University economist Esmael Adibi. He regularly tracks valley economic trends and is the co-creator of The Desert Sun Economic Index. "But any of them who are still in the market, I imagine they are having problems selling those homes," Adibi said.

The news isn't all gloomy. Some local experts maintain that consumer shopping and sales activity remain steady in the higher price categories, as baby-boom retirees and other second-home buyers look for deluxe homes at prices still favorable compared with other regions. "I truly believe that this market is still seeing good interest at the higher end," said Mary Garcia, an agent in the Palm Desert office of Dyson & Dyson Real Estate.

She said she is still seeing committed buyers, particularly in the $600,000 to $900,000 price range. "My office showed homes (in that range) to about 30 couples in two days in early September," Garcia said. She noted that about 10 percent of those shoppers would likely go on to close a deal on a valley home by the time the month was out.

Historically normal trend

Garcia said shoppers from outside the valley - places like Northern California and Los Angeles and Orange counties - currently comprise about 60 percent of the buyers and browsers she's been showing homes. Even at the high end, she said buyers are conscious of value. For instance, she noted that while $600,000 buys around 2,000 to 2,500 square feet in a new valley luxury home, the same space in a comparably built house would cost around $900,000 in competing regions of California.

Several local observers contend that the current market phase - being witnessed throughout California and the nation - is historically normal. The valley's current unsold inventory, for instance, is about where it was 10 years ago. They also note that all high-flying markets must eventually moderate to sustain long-term growth and bring the needs of buyers and sellers into balance.

"This housing market cycle or slowdown is different than others in the past in that local economies are still strong," said Greg Berkemer, executive vice president of the California Desert Association of Realtors. "Jobs are increasing, and incomes are not dropping. That may help mitigate its length and descent." Berkemer contends there is still pent-up demand - just not at some of the current price points. But as sellers lower their prices and "reality settles in" - with the market shifting into a true buyer's market - those priced out of the market over the past two years may find themselves able to get back in and purchase a home.

For now, according to real estate analyst Patrick Veling, seller motivation is the big unknown factor. Some valley sellers may have listed their homes out of fear of missing out on a market peak. However, most have not been lowering prices significantly as inventory has risen, and a truly enthusiastic buyers' market has not yet materialized.

"Is it a meltdown? No," said Veling, president of Real Data Strategies in Brea. He tracks all aspects of the local home market. "Can it lead to a potential reversal in prices? Possibly, if sellers are actually motivated." Especially at the higher end of the pricing scale, where sales are still steady.

Seen it before

Veling theorized that some sellers have enough equity in their homes, and are otherwise in a sound enough financial position, that there is little rush to drop prices. He said the valley real estate market remains in the "soft landing" mode that he and other experts projected more than a year ago. Mortgage interest rates are still historically low, and the rising inventory is the only fundamental that has changed, Veling said.

Some experienced home builders say what they're seeing now in the valley is nothing new to them. They point to residential building rates that have been slowing in recent quarters, and note that the region is well poised to avoid the problems that occurred in the early 1990s. That came at a time of recession when new construction got too far ahead of demand and created a costly glut of homes. "We've got a much smarter group of builders, and they are watching market conditions," said Bell. "They are aggressively managing the inventory." Homes are now being built in smaller phases, with releases timed to better match current demand, he said.

While larger national builders have been forced to make major adjustments in the current market - Toll Brothers, for instance, recently witnessed a rise in luxury-home orders being canceled and had to scale back production - the pace of the current market suits smaller, locally based builders just fine. Rudy Herrera, a partner in Palm Desert-based builder Family Development, contends that the current market is better suited to the valley's supply of qualified construction workers and materials.

Today's buyers don't have to wait months to see construction begin on homes they've purchased, as frequently happened to customers of several builders during the frenzy days of 2004. "No builder could possibly deliver 30 homes a month, even if they wanted to," Herrera said. In today's market, builders are satisfied selling four to 10 homes per month for each development.

Builders note that today's demand is still strong, especially in places like northern Indio, and the simultaneous slowdown in construction and sales should allow the valley to absorb its current new-home inventory in a year to 18 months. Builders' per-home profit margins may have dipped from their 2004 levels - going from 25 to 30 percent to around 10 to 15 percent, according to local experts.

But Herrera said current conditions are not abnormal for a growing community experiencing natural real estate cycles. "If we had somehow circumvented everything that happened in the last two years, people would look at the sales they're having right now and would be quite happy with them."

Today's market is very familiar to Mickie Riley, who's been in the home-building business for more than 30 years. Two years ago, he moved his company, Rilington Communities, from San Diego to Cathedral City. He said he's quite happy to be selling four to six homes per month in his valley developments. While their effects still linger in the valley market, builders like Riley say good riddance to the speculator crowd that helped create today's surplus of unpurchased homes.

"They're gone from this market - which is good for us," he said. "We have always tried to sell to families and communities." "It's better that way because if you sell to (nonresident investors) you end up with things you don't want - like neighborhoods of rental houses where you'd rather see owner-occupied homes."

Questions ahead

Builders and other real estate observers are betting that current inventory will be absorbed in the long term, as the valley population grows and demand for homes keeps rising. They point, for instance, to state projections that the valley's current population is likely to double by 2030, to more than 700,000 residents. Nevertheless, the experts acknowledge there are several economic factors that must be monitored to determine the long-term future of the local housing market. Economist Adibi pointed to the possible impact in late 2006 and 2007, when rising interest rates cause many home-buyers who took out interest-only and other nontraditional loans to face much higher monthly payments, as low introductory fixed rates turn adjustable.

Real estate agent Flores said she is already seeing a few cases where recent buyers are becoming overwhelmed by suddenly rising monthly mortgage payments, compounded by property taxes and insurance payments now coming due. Those owners could end up pricing their homes to sell quickly, so they can get out from under the loans and at least break even on their investments. That in turn could lower prices in the overall market.

In the current market, Flores theorizes that many potential valley buyers across all price ranges are sitting on the sidelines because they are uncertain of how mortgage interest rates, pricing and other economic factors will play out in the coming months. "People are wondering, should I buy now or wait six months?" she said. "They're not sure what to do."

Economists are also watching for a potential increase in foreclosures in the coming year. In the past year, foreclosures of valley homes have remained historically low, although notices of default - sent by lenders when payments are overdue - have been rising.

Another factor is what the Federal Reserve does in its efforts to stem inflation. The Fed recently paused in its moves to bump up interest rates, but Adibi said that pause may not hold for long if fuel costs and other consumer prices head up in the future. Fuel prices recently have been trending down.

Bell emphasized that most conditions that bear studying are out of the direct control of valley builders, buyers and sellers. "Right now we have a situation that builders can live with," he said. "I think we should be able to get through this market OK, as long as there are no further impacts from interest rates or some other economic event that hits the market."

For the most part, said analyst Veling, the long-term outlook for the valley real estate market - including the resale sector - remains positive. "The unknown is whether the sellers get motivated enough to start lowering their prices significantly," he said. "Right now that just is not happening much."