It's a wrap!
NAR’s Chief Economist Reviews 2005 Housing
Market
 By David Lereah
NAR Chief Economist
As we enter the New Year, REALTORS® can look back on perhaps the greatest five years in the history of the real estate brokerage business. During the past five years, existing home sales skyrocketed from 5.182 million homes sold in 2000 to an unprecedented 7.104 (estimated) million homes sold in 2005. Not surprisingly, everyone involved in real estate has grown accustomed to achieving record home sales on an annual basis since the beginning of this decade.
The real estate boom also generated great pressure on home values. By the end of 2005, home price appreciation posted an astonishing 12.7 percent appreciation rate (estimated). Perhaps more amazing was that a record 69 major metropolitan areas experienced double-digit price appreciation in the third quarter of this year. As a consequence, real estate became the only game in town, with a meaningful number of investors engaged in what could be considered speculative activities. Flipping, pre-construction purchases, and condo conversions were all part of the 2005 real estate landscape.
Furthermore, both investors and households purchasing homes to live in began to use what the media has labeled as “exotic” mortgage products, including interest-only loans, cash flow ARMs (with negative amortization) and 40-year mortgage products. All of these products were designed to reduce monthly mortgage payments so that the mortgage holder could stretch his or her income to purchase a higher-priced property. These exotic mortgages also introduce an element of payment risk as interest rates rise.
We also close this past year with a hint of moderation. The five-year boom clearly peaked in 2005, with home sales beginning to drop in the fourth quarter. Housing inventories rose in the latter months of the year. The number of “days on market” for listed properties increased as well. Why? As we enter 2006, many of our nation’s hot metro housing markets are transitioning from a seller’s market to a buyer’s market. Mortgage rates are rising and buyers are no longer willing to pay double-digit price increases for property. However, some sellers have stubbornly priced their homes with double-digit appreciation, leading to a stalemate between buyer and seller. As a result, sellers are keeping their homes on the market for a longer period of time, driving up both inventories and days on market.
But don’t panic. With the fundamentals in the housing marketplace still solidly in place, it is likely that housing activity will only moderate in 2006 rather than experience a sharp decline. Thirty-year mortgage rates are expected to rise throughout the New Year, but still remain below seven percent by year-end, keeping home financing relatively inexpensive. The supply of homes is expected to rise to about a 5.5 month supply, representing a historically normal inventory of homes. With demand for property continuing to remain strong due to favorable demographic and population trends, there will continue to be some upward pressure on home values.
The National Association of REALTORS®’s 2006 forecast suggests a soft landing for the housing industry rather than a hard landing. Existing home sales are projected to fall by almost four percent, to 6.843 million from the estimated 7.104 million home sales in 2005. Similarly, new home sales are expected to fall by almost five percent in 2006, to 1.225 million compared to an estimated 1.287 million in 2005. Housing starts (new construction activity) are expected to fall by seven percent, to 1.919 million versus an estimated 2.063 million in 2005. And the much anticipated home price appreciation is expected to decelerate back into single-digit territory, registering 6.1 percent and 7.3 percent for existing and new home prices, respectively.
Although it is difficult to follow the strongest year ever, housing in 2006 will not disappoint. Demand and supply will come into better balance, home price appreciation will slow to a more sustainable pace, and the housing industry should shed itself from some speculative activity. At year-end, 2006 is expected to post the second highest home sales on record. Sometimes less is more.
Happy New Year!
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