FRONTLINES: Economy

Find current economic data at REALTOR.org/research.

BY DAVID LEREAH

This storm too shall pass

For the past several years, real estate has kept the economy running strong while other sectors struggled to regain momentum after the tech bust.

Now it’s real estate’s turn to get rained on, with the U.S. Department of Justice filing an antitrust lawsuit against NAR’s Internet display policy, Hurricane Katrina destroying hundreds of thousands of properties in the Gulf region, and a blue ribbon tax commission appointed by President George W. Bush eyeing potentially disruptive changes to the mortgage interest deduction and capital gains taxes.

At the same time, media and Wall Street doomsayers continue to see housing bubbles bursting; national banking conglomerates are still trying to enter brokerage and thereby disturb the industry’s intensely competitive playing field; and secondary market companies Fannie Mae and Freddie Mac are in danger of being whittled down on Capitol Hill.

To boot, rising oil prices are imperiling economic growth, and the Federal Reserve is promising more interest rate hikes.

Despite this torrent of bad news, good days are still ahead for real estate. And 2006 will be a good year.

Oil prices will come back down. They’re defying gravity now, but that won’t last. Rebuilding in the Gulf region will help, too.

Interest rates will stay historically low, peaking at 6.7 percent by the end of 2006. And few markets will see downturns. Housing markets continue to be fundamentally sound, with sales fueled not by irrational buying but by continuing low mortgage rates.

Yes, sales will be cooler than they’ve been for the past few years. But that’s a plus, because as inventories rise modestly, appreciation will cool to a highly sustainable 4 percent to 7 percent level.

In the political arena, talk about tinkering with the MID and capital gains is always troubling, but the real estate industry will come together with a strong educational message to Congress about the crucial role the MID and other housing-friendly policies play in keeping the economy and households strong. We made a strong case against potentially dangerous tax changes 10 years ago, and we’ll do it again.

So in the end, the sun will come out for the housing industry. The housing markets will experience a soft landing, and the torrent of bad news will pass like a storm in the night.

Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

Migratory movement
The U.S. markets seeing strong population growth are those with high-paying jobs and high quality of life. Well-established markets with low salary and benefits ranges are also seeing population inflows. But as markets with strong in-migration continue to grow, housing affordability could drop.

Home Sales
High rate holds steady Sales of existing single-family homes held to the second-highest pace on record in September, with sales surging in some areas following hurricanes in the Gulf Coast area. Total existing-home sales—including single-family homes, townhomes, condominiums, and co-ops—were at a seasonally adjusted annual rate of 7.28 million units*, unchanged from August.
David Lereah, NAR’s chief economist, said near-record activity was supported by spiking home sales in areas surrounding the hurricane disaster zone. “We’re now getting some hard data from this region, with spot checks showing sharply higher home sales volume in areas outside the perimeter of the hurricane zone. The sales surge is more than offsetting declines,” he said.
Lereah said the housing market is entering a period of transition. “The underlying fundamentals are solid and sales will stay historically strong, but they will trend modestly down from current peaks,” he said.

*Revised from a figure reported in the November issue.



Editor’s note: Because of the hurricanes’ impact on the Gulf region, data for the regular Business Confidence feature has been delayed. The Business Confidence report will resume with the January 2006 issue.

November 1 Pending Home Sales Index: 128.8 The PHSI, based on signed contracts for existing homes, is an indicator of home sales expected to close over the following two months. An index of 100 is equal to the average level of contract activity during 2001, the benchmark year.

Find current economic data at REALTOR.org/research.