Home Sales Headed For Record 2005

By: Kemba J. Dunham: The Wall Street Journal Online
Housing industry economists raised their forecast for home sales this year, noting that demand remains strong due to lower-than-expected mortgage rates.

Economists at the National Association of Realtors, a trade group, said they expect home sales to total a record 8.13 million units in 2005, up 1.8% from last year. Of that total, sales of previously owned homes are expected to reach 6.89 million units, up 1.6% from 2004. Sales of newly built homes are expected to total 1.24 million this year, up 3.2% from 2004.

When the NAR released a previous housing industry forecast in February, the group said it expected existing-home sales to decline 2% and new-home sales to decline 6.2%, in both cases due to rising interest rates. Instead, long-term interest rates have fallen this year. Last week, Freddie Mac said that rates on conventional 30-year fixed-rate mortgages were 5.6%, down from about 6.4% a year ago.

"We expected that mortgage rates would go up much higher, but it looks like they will be in a very favorable range," which will keep demand strong, says Lawrence Yun, a senior economist at the NAR.

The trade group also estimates that home builders will have started construction on 2.02 million home units this year, up 3.4% from 2004 and the highest level of new-home starts since 1973.

Although some economists worry that home builders may be creating too much supply, Mr. Yun doesn't believe that is the case. "Home-price appreciation over the last three years has been nearly 10% nationwide in each of the years, and that implies that there is a housing shortage," he says. "To alleviate the shortage, we will need close to two million housing starts, and we suggest that will be the case this year."

The NAR also estimates that home prices will continue to climb. The national median existing-home price for all housing types is expected to rise 8.8% in 2005 to $201,500, while the typical new-home price will increase 5.7% to $233,600, the group says.

"There are glaring affordability problems developing in many of the hot markets, but the fact that prices are as high as they are means that the transactions are occurring," says David Seiders, chief economist for the National Association of Home Builders. "The market is due for some cooling off, but how that evolves depends on the long-term interest rates."

Even markets that have been left behind in the housing boom, such as those in the Midwest, may see some increases this year, according to the NAR. Cities like Detroit and Columbus, Ohio, saw little appreciation in home prices last year. But economists expect home sales to improve in those areas as the Midwest becomes more affordable compared with the rest of the country and lures more buyers. They also see the job market there strengthening, which could further strengthen the housing market there.

Mr. Seiders says that "two wild cards" in the overall U.S. market are "overly aggressive" lenders offering such deals as interest-only loans, and speculative investors. But he doesn't see them being facilitators of a market crash. As long as the economic expansion continues at a steady pace with strong job growth, says Mr. Seiders, "I think the best bet is a slowdown on the price appreciation and a rebalancing of the housing market without a lot of damage."

The NAR estimates that the U.S. gross domestic product is expected to grow 3.5% in 2005, with the unemployment rate holding around 5.2% for the rest of the year. It also predicts modest inflation.