The boom is over, but what’s ahead is far more sustainable

Resist misty-eyed look back
BY: DAVID LEREAH: REALTOR® Magazine Online
Faced with the prospect of home sales cooling through the end of this year, it’s tempting to pine for the boom of the last five years, when we saw home sales volume and price appreciation jump 33 percent and 42 percent, respectively, over the period on a nationwide basis. But I would resist the temptation.

Along with all that was good about the last five years, the boom also ushered in an unhealthy rise in market speculation and reliance on exotic financing such as interest-only loans, two trends that helped accelerate price appreciation and thus the affordability problems we’re seeing even among middle-income households.

Make no mistake, a soft landing with cooling sales and easing appreciation this year will help settle the market in two ways. First, it’ll give household income a chance to gain ground lost to home prices. Second, it’ll drive safety-conscious buyers back into more stable fixed-rate financing products.

I’m forecasting for this year 6.62 million existing-home sales, down 6.7 percent from 7.1 million sales in 2005, and 5.7 percent appreciation, a much more sustainable rate than the spectacular 12.5 percent rate we saw in 2005.

These are strong numbers by any measure—the fourth best for existing-home sales on record. The numbers will get even better in 2007. Existing-home sales are forecast to rise to 6.7 million and appreciation to stabilize further at 4.2 percent.

Despite what you hear in some media reports, there’ll be no hard landing. Even in the areas seeing the most pronounced leveling of home sales, such as Los Angeles and Phoenix, new jobs and economic growth remain strong. That vibrancy combined with continuing favorable trends in demographics and interest rates, among other things, will sustain solid housing demand. And we’re continuing to see a pick-up in demand in many markets, such as Dallas and St. Louis, which didn’t see strong growth during the boom.

So, I would resist getting misty-eyed over the passing of the boom. Although some dark clouds like rising oil prices and an unexpected interest rate hike could bring a chill, a cool breeze is just what we need now to ensure a temperate tomorrow.

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

Who’s your perfect second-home buyer?
A married baby boomer couple with a household income of around $100,000 and no children living at home.

Business Confidence
Cooling unabated Sales are expected to keep cooling in the coming months as buyer traffic continues to slow. Seller traffic is expected to pick up in the months ahead, which would help grow inventories and hold down prices, enhancing affordability. Practitioner confidence was surveyed in April and looks ahead six months.

Results are based on 415 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
Softening to continue Sales of existing homes eased in April, continuing a long-anticipated softening trend that NAR’s leading home sale indicator suggests won’t abate in the next month. Total existing-home sales, which include single-family houses, townhomes, condominiums, and co-ops, eased in April by 2 percent to a seasonally adjusted annual rate of 6.76 million units from a pace of 6.9 million* in March. Meanwhile, the April pending home sale index dipped 3.7 percent to 111.8 from 116.1 in March.

*Revised downwardly from a figure reported in the June issue.
**Seasonally adjusted annual rate, which is the actual rate of sales for the month, multiplied by 12 and adjusted for seasonal sales differences.