After rising smartly for many years, home prices in South Bend, Ind., have finally begun to fall-dropping 5% in the second quarter from a year ago.

Home to the University of Notre Dame, South Bend is an oddity in a strong national housing market. Nationally, homes are selling at a record- breaking pace, and prices increased 4% in the second quarter.

But economists say the small city is well worth watching because it may offer an early sign of the boom's slowly running out of steam. They predict many more metropolitan areas will see prices level off or fall in coming quarters.

"We're at the tail end of a very, very substantial boom, and I expect that boom is just about over," said Jason Altman, a research economist at the National Association of Realtors.

A handful of other metropolitan areas experienced median- price declines in the second quarter. Among them were Tallahassee, Fla., Minneapolis-St. Paul, and Norfolk, Va.

In South Bend, Realtors are scratching their heads over the slowdown. After all, median prices rose 11% in 1996 over 1995, and 7% in 1995 over 1994.

"It's been hard for us to understand," said Barb Tharp, a broker who owns Re/Max Connection in Granger, a South Bend suburb.

"Last year was a very, very strong year (with) new companies coming to town," Ms. Tharp said. This year 1,400 homes are listed for resale, and they're slow to go," she said.

"We've had such a good market for 10 years." It's been "boomtown for us," said Marsha Lambright-Huckins, a broker who owns Re/Max 100 in South Bend. Now South Bend is going through "a price correction," she said.

One factor in slow resales has been competition from new homes, Realtors said.

The Department of Commerce reported that permits to build single-family homes were up 17% in 1996 from the year before. In all, 1,019 permits were issued in the South Bend metropolitan area.

And building has tapered off only slightly in recent months, said Julie MacKenzie, executive officer of the Home Builders Association of St. Joseph Valley, Mishiwaka, Ind.

"We've been very, very pleased," Ms. MacKenzie said.

Builders in the South Bend metropolitan area were issued 496 single- family home building permits through June, down marginally from 503 through June 1996, Commerce Department numbers show.

Though the news is still mostly good in the Midwest and around the nation, Diane C. Swonk, deputy chief economist of First Chicago NBD Corp., is worried that an economic slowdown-when it comes-will hit homeowners and creditors very hard.

"The risks to creditors have never been greater," Ms. Swonk said.

For one thing, after so many years of price rises, she said there's "less upside." Thanks to aggressive mortgage lending and a surge in home equity loans, homeowners have low equity, she said, making them more likely to walk away from their homes if they hit a rough patch financially.

Home prices have been rising steadily in the Midwest since the early 1990s. That's due, in part, to pent-up demand from the 1980s, when high interest rates locked many out of the market.

Prices also have been fueled by strong rates of household formation, as immigrants and single households take advantage of lower interest rates to buy. Supporting these trends, of course, has been a booming economy.

In the Midwest, strong spending by consumers nationally has benefited the auto industry, and strong business investment has led to thousands of new jobs at equipment makers like Caterpillar in Peoria, Ill., and John Deere in Wisconsin and Iowa.

In South Bend, too, job growth has been strong. Unemployment was 2.9% in July.

But the area is adding service jobs-a broad category that includes work at Notre Dame, the area's largest employer, and in health care, retail, and hotels-and shedding factory jobs.

South Bend once boasted famous names like Studebaker and Bendix. They faded away in the 1960s, and the drain continued into this decade. Of 135,400 jobs in July, only 16% were in manufacturing; 77% were in service.

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