FRONTLINES: Economy

Find current economic data at REALTOR.org/research.

BY DAVID LEREAH

Soft landing for hot markets

With price gains in markets remaining strong, analysts continue to vie with one another to yell “housing bubble” the loudest. Given the debacle in the equities markets five years ago, the vigilance in ringing alarm bells about housing is understandable but wrong.

Thanks to strong fundamentals led by ongoing boomer demand, only two things can really derail our strong markets right now: a significant increase in mortgage rates (by at least two or three percentage points) or a sharp, damaging recession accompanied by a large drop in jobs (say 4 percent to 6 percent). Either of these scenarios would dampen demand, leading to rising home inventories and weakening prices.

But neither of those scenarios is in the cards. The U.S. economy created 207,000 jobs in July, the largest gain since April. And mortgage rates in mid-August were hovering below 6 percent.

The more likely future for housing is a classic soft landing. Although prices will decline in a few overheated markets, in most areas home prices will continue to rise, albeit at a modest, more sustainable pace than in the past few years.

At the same time, mortgage rates will continue to rise, making residential properties less affordable, inhibiting demand a bit. That will soften home inventories, prompting price appreciation to slow. This scenario is already unfolding in key markets.

Take Las Vegas. The city was on top of the housing world two years ago, experiencing 52 percent price appreciation. Price growth eased to 30 percent last year, and in mid-2005 it stands at 15 percent. This is air slowly leaking from a balloon, not a bubble popping.

The reason Las Vegas is experiencing a soft rather than a hard landing is its market fundamentals: People are moving into the city, not out, and the economy is adding workers, not laying them off.

And so it goes for much of the country. The Washington, D.C., metro area, for example, added 110,000 jobs over the past two years but only 57,000 new homes. That keeps demand ahead of supply. But with mortgage rates inching up, price appreciation is expected to slow to 10 percent from 20 percent before settling in the 4 percent to 6 percent range for the remainder of the decade.

The message to our housing vigilantes is this: Bubble talk makes for good TV but bad economics.

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

The impact of Hurricane Katrina on Gulf Coast housing stock is likely to dwarf that of previous hurricanes. Expect shortages and price increases in construction material and shortages in labor.

Business Confidence

Easing expected. Practitioners see strong current home sale conditions, but their confidence in markets in the months ahead is tempered. Practitioners expect buyer traffic to slow while seller traffic remains robust, potentially setting up an imbalance between supply and demand. Practitioner confidence was surveyed in August and looks ahead six months.




Home Sales

Slight drop. Existing single-family home sales declined in July from a record in June but remain at the third highest level on record. Sales of single-family houses, townhomes, condominiums, and co-ops slipped 2.6 percent to a seasonally adjusted annual rate of 7.16 million from a record of 7.35 million in June.*

*Revised from a figure reported in the September issue.




September 1 Pending Home Sales Index: 125.1

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.