Talking Points: National Outlook -- Residential

As the nation’s richest source of housing data, the National Association of Realtors^® expects existing-home sales to hold fairly stable during the first half of 2008 and improve in the second half of the year as the full impact of higher loan limits for conventional mortgages begins to affect the market. However, new-home sales, which account for 15 percent of the market, are not expected to recover until 2009.

More people are now in a position to enter the market, with mortgage interest rates near historic lows, flat home prices in most of the country, and 4 million jobs created in 2006 and 2007.

Many potential buyers are creating pent-up demand by waiting on the sidelines, weighing mortgage interest rates and home prices, as well as waiting for additional signs of stability. Household formation was only half of what it should have been last year given the demographics of an expanding population and job growth.

It is impossible to time the market, and over the long term, homeownership has proven to be one of the best ways to build long-term wealth.

Given the underlying fundamentals, the long-term prospects for housing are solid.

The 30-year fixed-rate mortgage should rise slowly to 6.3 percent by the end of this year and then hold at that level for most of 2009. 

Economic growth, as measured by the Gross Domestic Product, is forecast to be 1.7 percent this year and 2.0 percent in 2009.

Consumer price inflation is likely to be 3.6 percent in 2008 and 2.4 percent next year, while disposable personal income should rise 1.4 percent this year and 2.5 percent in 2009.

Unemployment is projected to average 5.3 percent this year and 5.6 percent in 2009.

Homeownership offers immediate benefits and long-term value.

Most sellers continue to see an excellent return on their investment. People who bought their homes six years ago have seen a median 24 percent gain in their home’s value during that time. At the same time, buyers have a long-term view and plan to stay in their home for a median of 10 years.

High inventory levels have given buyers more choices and, combined with historically low mortgage interest rates and relatively flat prices in most areas, have created more favorable conditions for home buyers. In contrast to conditions during the housing boom in most of the country, home sellers in many areas now are motivated to negotiate both price and terms.

Housing in many areas of the country is now more affordable. Housing affordability, as measured by the relationship between home prices, family income and mortgage interest rates, is expected to be 15 percent higher this year than 2007. That is especially helpful for young households who want to make the transition from renting to owning.

Related industries continue to benefit from the demand for goods and services associated with home purchases, although that stimulus is below the level seen during the peak of the housing boom.

Home sales remain historically high. Following the five-year housing boom from 2001 to 2005, home sales in 2007 were still the fifth highest on record, while the aggregate median existing-home price dipped 1.4 percent on the heels of prolonged abnormal price growth.

Existing-home sales, including single-family, condo and co-op, totaled 5.66 million last year, the fifth highest on record, with an annual pace of 4.9 million expected during the first half of 2008, rising notably to a level of 5.8 million in the second half. A total of 5.38 million are expected for all of 2008, rising to 5.60 million in 2009.

New-home sales, which totaled 775,000 in 2007, will probably fall 31.7 percent to 529,000 in 2008 before rising 12.5 percent to 595,000 next year. Housing starts totaled 1.36 million units in 2007, and are forecast at 987,000 this year and 980,000 in 2009. Builders are continuing to pull back on housing construction to decrease inventory and support prices on completed projects.

The median existing-home price for all housing types is likely to decline 8.4 percent in the first half of this year, and then begin to stabilize in the second half to a median of $205,000 in 2008 before rising 4.4 percent next year to $213,900 as inventory is drawn down over the course of this year.

During 2007, the percentage change in median home price was distorted downward as more home sales shifted away from high-cost markets to moderately priced areas, in contrast with the sales distribution in 2006. Within given markets, most areas can expect a fairly flat price performance while others are showing healthy gains.

New-home prices rose 0.3 percent last year but should fall 3.1 percent to a median of $239,500 in 2008 before rising 5.4 percent in 2009.

See National Outlook – Commercial talking points for reports and forecasts on the office, industrial, retail, and multifamily sectors.

Updated May 7, 2008