Housing Market to 'Normalize' in 2006

NAR: REALTOR® Magazine Online
The key word for the housing market in 2006 is balance, with a return to a more normal rate of price growth, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says current trends in the housing sector are healthy. “We don’t need to break a record every year for the housing market to be good—in fact, cooling sales are necessary for the long-term health of this vital sector,” Lereah says. “A modest slowdown in home sales, coupled with improvements in housing inventory, means the market is in the process of normalization. That will help to bring balance between home buyers and sellers, yet sales will remain historically strong.”

After setting a fifth consecutive annual record, projected to be 7.10 million units for 2005, existing-home sales are forecast to ease by 4.4 percent to 6.79 million this year, which would be the second highest on record. New-home sales, which should be a record 1.29 million for 2005, are expected to decline 6.0 percent to 1.21 million in 2006—that also would be the second best year in history. Total housing starts for 2005 are seen at 2.07 million units—the highest since setting a record 1972—with a 6.6 percent slowing to 1.94 million this year.

“A lot of demand has been met over the last five years, and a modest rise in mortgage interest rates is causing some market cooling. Along with regulatory tightening on nontraditional mortgages, there will be fewer investors in the market this year,” Lereah says. The 30-year fixed-rate mortgage is likely to increase gradually to 6.7 percent during the second half of the year. “This will preserve generally favorable affordability conditions and keep the housing market at a more sustainable sales pace.”

NAR President Thomas M. Stevens from Vienna, Va., says price appreciation should be at more normal levels across most of the country. “Buyers are no longer competing for a tight supply,” says Stevens, senior vice president of NRT Inc. “That means home prices generally will rise much closer to long-term norms, which is the overall rate of inflation plus one or two percentage points. Lower price appreciation will keep the door open to first-time buyers while preserving the investment advantages of home ownership for sellers.”

The national median existing-home price for all housing types, projected to jump 12.9 percent to $209,100 for 2005, is forecast to rise 5.1 percent to $219,700 this year. The median new-home price, which should be up 4.6 percent to $231,300 for 2005, is expected to increase 6.0 percent this year to $245,200.

Inflation as measured by the Consumer Price Index is projected to rise 3.4 percent for 2005 and 3.0 percent in 2006. Inflation-adjusted disposable personal income is forecast to increase 1.3 percent for 2005 and 4.6 percent this year.

Growth in the U.S. gross domestic product is likely to be 3.6 percent for 2005, with GDP seen at 4.0 percent this year. The unemployment rate is expected to drop to 4.8 percent by the end of the year.