Realty Times

NAR's Optimism Over Housing Outlook Grows
Jan 11, 2007, 12:00 pm PST

The chorus is growing in the chant that housing has struck bottom and will slowly rise again. A new report by the National Association of Realtors suggests rising existing home sales through 2007 and 2008 and a turn-around for new home starts by summer 2007, but homes won't appreciate over inflation rates for the first time in decades. And that's a little scary.

Since 1968, when the NAR first began keeping records, homes have beaten inflation by one or two percentage points annually, making them a good investment, coupled with tax incentives and other benefits, for homeowners. However, between 2001 and 2006, homes appreciated 50 percent, causing affordability issues to put a stop to rising prices. Then the financial press began drumming on the housing market as a bubble bursting, causing buyers to sit on the sidelines. The effect was slower sales, falling prices and buyers and sellers at a standoff. The only saving grace in a flat appreciation scenario is that homebuilders are curtailing building new inventory. After two years of building below the rate of household formation, the housing market will start to improve as new forming households seek the benefits of homeownership.

David Lereah, NAR's chief economist, says, "We have to keep in mind that we were still in boom conditions during the first quarter of 2006 with a high sales volume and double-digit price appreciation. “We're starting 2007 from a relatively low point, so even with a gradual improvement in sales it'll be pretty much of a wash in terms of annual totals. The good news is that the steady improvement in sales will support price appreciation moving forward.”

NAR economists expect existing-home sales for 2006 to come in at 6.50 million, making the year the third highest on record. For 2007, the trade organization predicts a total of 6.42 million homes sold for 2007.

As much as new home starts have plummeted, builders still recorded the fourth highest year in sales at 1.06 million. Projections for 2007 are approximately 957,000. Total housing starts for 2006 are likely to come in at approximately 1.81 million units, with 1.51 million forecast in 2007, which would be the lowest level in a decade. Builders, says the NAR, are pulling back on new construction to support prices of remaining inventory.

Helping to make home purchases more attractive will be mortgage rates held under seven percent. The 30-year fixed-rate mortgage will probably rise to 6.7 percent by the fourth quarter of 2007, says the NAR. Last week, Freddie Mac reported the 30-year fixed rate at 6.18 percent -- far below earlier consensus forecasts.

“The current interest rate environment and housing inventory levels present a window of opportunity for potential buyers,” Lereah says.

But fears of a slowing economy and a continuing fall in housing prices until inventories are absorbed still has many buyers fearful.

Inflation, as measured by the Consumer Price Index, and calculated by the NAR as part of its economic outlook is anticipated to rise about 2.2 percent annually.

The NAR predicts that the national median existing-home price for all of 2006 is expected to have risen 1.1 percent to $222,100, and then gain 1.5 percent in 2007 to $225,300. The median new-home price, after rising only 0.3 percent to $241,600 in 2006, is projected to grow 3.0 percent in 2007 to $248,900.

For the first time in decades, housing prices won't beat inflation.

Why such a difference? Materials alone cause new home prices to rise approximately four percent annually, according to the NAHB. One of the reasons new homes are more expensive is because buyers have been demanding more square footage and luxury finish outs with materials such as granite countertops and hardwood floors. If builders are going to sell below their annual materials costs, that suggests several possibilities:

1. New homes will have smaller square footage and lots, and retain luxury finishes
2. Amenities that many buyers have taken for granted will be packaged as "upgrades"
3. Builders will seek to cut costs with lower quality materials while maintaining square footage
4. Some materials such as hardwood floors will still be available for luxury homes, but will no longer be offered in homes below a certain price point
NAR believes that the economy will not go into recession and that housing for the long haul is a "sound investment.” Inflation, while growing, is well below the rate of last year at 3.2 percent. Growth in the U.S. gross domestic product is seen at 2.5 percent in 2007, compared with 3.3 percent last year. Inflation-adjusted disposable personal income should grow 3.4 percent this year, following a rise of 2.7 percent in 2006.