Saturday, December 18, 2004

Home Industry to Simmer, Not Shimmer

By Ilaina Jonas NEW YORK (Reuters) -

Put the bubble on the back burner.

Although a record for sales of existing and new homes is all but sealed for 2004, demand isn't expected to burn out in 2005. Instead, many predict the boil will turn into a simmer.

"It's hard to say that this level of housing is sustainable," A.G. Edwards & Sons analyst Gregory Gieber said. "It's going to be a very orderly retreat. Most of us believe that housing starts will soften going into 2005."

Next year is expected to have the title of "second best" with the National Association of Realtors predicting 2005 existing home sales of 6.38 million.

"It's going to be a great second year," said Jay Brinkmann, Mortgage Bankers Association vice president for research and economics.

That's down from projected record sales of 6.58 million existing homes in 2004, a jump of 7.9 percent over the previous year, according to the National Association of Realtors.

On the new home front, single-family new home construction starts in 2005 are expected to be 1.55 million, down slightly from the predicted 1.6 million for 2004, according to the National Association of Home Builders.

New single-family home sales are expected to be about 1.12 million in 2005, down from 1.18 million this year.


Home prices are expected to moderate, with 2005 existing-home sale prices rising 5 percent versus the 7.9 percent increase to $182,500 in 2004, according to the National Association of Realtors.

The median new-home price is expected to rise 5.8 percent in 2005, compared with the 8.9 percent jump in 2004 to $214,600.

Super-low mortgage rates have been behind the surge in home buying this year, with the average 30-year mortgage rate dropping below 5 percent earlier this year. In spite of the Federal Reserve's five short-term rate hikes totaling 1.25 percent this year, long-term rates have not risen as much.

The average 30-year mortgage rate remains about 5.75 percent, still a relative bargain.

All the numbers mean that the red-hot demand will cool.

Some hefty price increases of 20 percent or 30 percent seen in the past two years in many areas most likely are over.

Both groups said their predictions are based on the 30-year mortgage rate averaging 6.4 percent in 2005. The Mortgage Bankers Association puts it at about 6.2 percent.

All bets are off, of course, if the U.S. economy sinks, job growth tanks, or the dollar becomes so weak that the Fed is forced to raise rates to attract buyers of U.S debt.

"I think there are some areas where home-price increases have been extraordinarily hard to sustain," said Michael Carliner, National Association of Home Builders economist, referring to Orange County, California, the west coast of Florida, and some areas around New York.

"I don't know if they're actually going to decline, but I think they're probably going to stagnate," he said.

Even if prices decline in the hot areas, they won't fall as much as they rose.

"Home owners are reluctant to accept a loss," he said.


Housing is not subject to bubbles in the same way that other investments are because the basic need to live somewhere mitigates the risk of flooding the market with empty homes, according to Brinkmann of the Mortgage Bankers Association.

However, the single-family full-time residential rental housing sector, which makes up 14 percent of all single-family homes and townhouses, is a concern, Brinkmann said. The vacancy in this segment of the market stands at 9.2 percent, according to U.S. Census data.

For more than a year, the larger publicly traded home builders have been saying that they will benefit from a shrinking market because they will gain market share as their smaller rivals are crushed by higher borrowing costs.

The larger publicly traded home builders have cleaned up their balance sheets. Many have investment-grade credit ratings and cheaper access to capital. In addition, most have professional management and can benefit from economies of scale. Finally, their markets are geographically diverse so a downturn in one area in the country won't be lethal.

But Peter Zuleba, senior portfolio manager of Glenmede Trust Co., said the theory probably won't be put to the test for about another year. That's because most of the large home builders have so many houses on order that their revenue for 2005 is nearly fully accounted for, based on 2004 contracts.

"'05 looks fairly secure," Zuleba said. "It would be more as we get into late '05 and as you start into '06" that people will know whether the housing market remains strong or starts to falter.


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