Monday, December 06, 2004

In Housing Sales, Frenzy Is Giving Way to Balance

By ROBERT D. HERSHEY Jr. , The New York Times

THE biggest boom ever in the price of America's houses - four straight years of gains averaging almost 7 percent annually - is losing steam.

In many markets, houses that once would have attracted swarms of buyers and multiple bids are no longer snapped up in a weekend. Fewer sell for more than the original asking price. Some builders are again offering concessions to overcome newly revived price resistance, and more deals are falling through.

"We've been in a frenzy" in real estate the last two years, said S. Lawrence Yun, senior economist for the National Association of Realtors. "In 2005, we're going back to a more healthy balance." He forecasts that the pace of price increases will slow to 5.3 percent next year.

The lowest interest rates in a generation have fueled demand, the main factor causing prices to rise. But most analysts agree that the market will cool off, although some worry that the market has become so severely overvalued that prices could fall in some areas, as they did in California in the 1990's.

One reason for the cooling could be heavy recent speculative buying, with people acquiring houses in hopes of a quick profit without making improvements to the homes. Such purchases contributed to a 12.97 percent surge in average home prices from the third quarter of 2003 to the third quarter of 2004, the biggest four-quarter increase since 1979, when inflation began to rise at double-digit rates, according to the Office of Federal Housing Enterprise Oversight. That was almost five times the gain of other goods and services measured by the Consumer Price Index.

The median price for existing single-family homes reached $191,000 last June, up from $170,000 in 2003; it settled at $187,000 in October, according to the most recent figures available from the agency. Property held by speculators, now estimated to account for as much as 15 percent of sales, represents hidden inventory that could suddenly be put up for sale should the market sour.

The deceleration of prices expected next year - the rise for 2004 is estimated at 6.9 percent - reflects an almost certain continuation of increases in interest rates by the Federal Reserve, analysts said. David F. Seiders, chief economist for the National Association of Home Builders, predicts that rates on conventional 30-year mortgages will average 6.40 percent next year, up from the current 5.75 percent, and will reach 6.75 percent by the end of 2005. He nevertheless projects that 1.87 million new homes will be built next year, only 4 percent fewer than the 1.95 million likely to be built this year. That includes a record 1.6 million single-family homes.

Current prices are at record levels in relation to average incomes, so higher interest rates would almost certainly make purchasing a home harder for prospective buyers. The low rates of recent years have helped buyers afford more expensive houses.

The sales-damping effect of higher interest rates might, however, be offset by an increase in employment, which could give more people the cash and the confidence to buy homes.

Houses have appreciated 1.5 to 2 percentage points faster than the rise in the Consumer Price Index. With inflation at about 3 percent, the 7 percent advances in house prices in recent years are at least twice the norm.

The latest median price for a home is $266,400 in the West; $217,900 in the Northeast; $170,400 in the South; and $152,000 in the Midwest. Areas with the biggest increases in the sale prices of houses in the 12 months ended Sept. 30 were Nevada, Hawaii, California and the District of Columbia and Rhode Island.

NEW Jersey ranked 8th, New York 12th, and Connecticut 13th in growth of house prices. The weakest growth was in Texas followed by Utah, Indiana, Mississippi and Alabama.

Many industry analysts said they believed that the new year would bring continued, if more subdued, gains as the nation's homeownership rate approaches a record 70 percent.

"Although more locations are now at greater risk of a home-price decline than a year or two ago, a sharp correction is unlikely unless the economy unexpectedly contracts," the Joint Center for Housing Studies at Harvard reported in its annual appraisal.

Mr. Yun, the analyst for the Realtors' association, said in October, "Homeowners can expect $10,000 equity gain from home-price appreciation in 2005." Increases in personal wealth from higher home values have significant effects on the economy at large. Economists have estimated that each dollar increase in real estate assets generates 8 cents of additional spending that year while the same gain from stocks and bonds adds only 2 cents to spending.

The overall economic effect of a rise in home values next year could be muted, however, because fewer people are refinancing their mortgages as interest rates rise. Over the last four years, falling rates have led homeowners to tap the equity in their homes while lowering their monthly payments, freeing up money to spend. But the Mortgage Bankers Association of America predicts the volume of mortgage refinancings will slide almost 43 percent next year, to $680 billion from an estimated $1.19 trillion in 2004.

Even though more people than ever already own homes, economists say that several factors will work to keep the demand for houses robust. Inventories of available housing are low, for example, because environmental and other constraints limit new supply in some of the hottest markets. And immigration provides a steady source of new buyers, since immigrants rate owning a home as their top priority - more so than the general population.

That could compensate somewhat for the fact that fewer first-time buyers can afford homes. The housing affordability index for first-time buyers stood at 74.7 for the third quarter of this year, down from an average of 79.7 for 2001 to 2003, according to the office of housing oversight.

That suggests that a family with a median income made less than 75 percent of the money needed to qualify for a mortgage to buy a median-priced starter home, which jumped to $160,200 in the third quarter from $125,600 in 2001. The index for the third quarter shows median income for first-time buyers was $31,225. (By contrast, the index for all buyers remains relatively high - 132.2 in October. That suggests that a family with a median income had more than enough money to buy a median-price home.)

"We're going to see more moderate price appreciation" next year, said Nicolas Retsinas, director of the Harvard center. "If you're buying a house now primarily for investment, you're probably going to be disappointed. But if you're buying to live in it, though it's not riskless, in the long run you should be fine."

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