FRONT LINES: Economy

BY DAVID LEREAH

Sometimes, second is best

The strongest year ever in housing sales, which is what we had in 2005, will be a difficult act to follow. But business this year will not disappoint.

I’m forecasting existing-home sales of 6.843 million units—the second-best year ever—down about 4 percent from an estimated record 7.104 million units in 2005.

New-home sales will see a similar easing, to 1.225 million units from 1.287 million.

Home price appreciation, after reaching an astonishing estimated 12.7 percent national annual rate, will decelerate back into single-digit territory, registering 6.1 percent and 7.3 percent for existing and new home prices, respectively.

This cooling is exactly what markets need today, because it helps check the rise in speculative buying and the growth in risky mortgages, such as the interest-only loans we started seeing at the height of the boom.

That risk-taking changed the residential real estate landscape in significant ways by encouraging some investors to flip properties and home buyers to spend beyond their means.

There will be some adjustment, of course, as many of the hottest areas transition from a seller’s to a buyer’s market.

We’re already seeing inventories rise and days-on-market increase as buyers and sellers search for equilibrium in pricing, with buyers saying no to double-digit price hikes and sellers dragging their feet before agreeing to adjust their price downward.

From a long-term perspective, though, the fundamentals in the housing marketplace are as solid as ever:

• Thirty-year mortgage rates will rise throughout 2006 but remain below 7 percent by year-end, still very inexpensive.
• The inventory of homes will rise to about a 5.5-month supply, a historically normal level after years of tight supply.
• Pressure on home prices will remain upward thanks to continuing favorable demographic trends in household formation and wealth accumulation, among other things.

In the end, 2006 will bring positive change—better balance between supply and demand, slower but more stable price appreciation, and less speculative activity—yet still be the second-best year we’ve ever had. This is a classic instance in which less is more.

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

Taxes
States and localities often find themselves caught between a rock and a hard place trying to meet heightened demand for public services without running afoul of voter antipathy to tax hikes. One connection in the debate that’s often missed, though, is that tax increases that lead to better public services can drive up home values, while low taxes that lead to diminished services can pull down property values.

Business Confidence
Spring optimism. Practitioners believe home sales will tick up in the months ahead as the spring selling season starts. After dipping in the fall months, expectations, led by a solid increase in buyer traffic, show a sizable uplift. Practitioner confidence was surveyed in December and looks ahead six months.

Results are based on 407 responses to 3,000 surveys sent to large and small real estate offices. The survey asks practitioners to indicate whether conditions are strong (100 points), moderate (50), or weak (0). Responses are averaged to derive results.



Home Sales
Welcomed easing continues. Existing-home sales declined in November but remain historically high. Total existing-home sales—including single-family houses, townhomes, condominiums, and co-ops—eased 1.7 percent to a seasonally adjusted annual rate of 6.97 million units in November from a pace of 7.09 million in October.




January 1 Pending Home Sales Index: 120.6
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.