Existing-Home Sales Expected to Fall 6.8% This Year

Even with the decline, 2006 is expected to be the third-strongest year for home sales, NAR says. Slower appreciation will help preserve long-term affordability.
NAR: REALTOR® Magazine Online
The housing boom has ended but sales at historically healthy levels will continue, and price appreciation will return to normal patterns across much of the country, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says home sales are settling into a slower pace. “In recent years we were occasionally challenged to find appropriate superlatives to describe surprisingly high home sales,” he says. “Now the housing market has cooled, but 2006 still expected to be the third strongest on record. In this case, experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability.

"But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable,” Lereah adds.

Existing-home sales are projected to drop 6.8 percent to 6.6 million this year from the record 7.08 million in 2005. New-home sales are forecast to fall 13.4 percent to 1.11 million from a record 1.28 million in 2005. Housing starts are likely to decline 6.2 percent to 1.94 million in 2006 compared with 2.07 million last year.

NAR President Thomas M. Stevens from Vienna, Va., says rising interest rates have slowed home sales in many high cost markets, while job growth has boosted sales in some moderately priced areas.

“Broadly speaking, rising inventories have taken the pressure come off of unsustainable home price growth,” says Stevens, senior vice president of NRT Inc. “For most of the nation, this means future home price gains will be much closer to the normal returns we expect from housing.”

The 30-year fixed-rate mortgage should average 6.9 percent during the second half of the year, and the unemployment rate is expected to average 4.8 percent in 2006.

The national median existing-home price for all housing types is forecast to rise 5.3 percent this year to $231,300. With more construction in 2006 taking place in lower cost housing markets, the median new-home price is projected to increase 0.8 percent to $242,900.

“Historically, home prices rise 1.5 to 2 percentage points faster than the rate of inflation, so the rise we anticipate in existing home prices this year is actually a little above the high end of historic norms,” Lereah said. “The double-digit home price gains we saw in 2005 underscore what a superlative year it was.”

Inflation, as measured by the Consumer Price Index, is seen at 3.1 percent in 2006, compared with 3.4 percent last year. Growth in the U.S. gross domestic product is likely to be 3.4 percent this year. Inflation-adjusted disposable personal income should grow 3.1 percent this year.