Conflicting Outlooks For 2006 Housing Market by Blanche Evans
Forecasters predict that housing will continue its downturn, but predictions are mixed when it comes to how much in 2006. The National Association of Realtors say that housing sales should level-out and remain at historically high levels, according to the National Association of Realtors®. Mortgage rates are trending up, but not so fast as to derail the housing market. David Lereah, NAR's chief economist, expects the 30-year fixed-rate mortgage to rise to 6.9 percent by the end of the year. He says, "Economic growth and job creation are providing a favorable backdrop for the housing market, but rising interest rates have an offsetting effect.” Growth in the U.S. gross domestic product is forecast at 3.7 percent in 2006, while the unemployment rate should average 4.8 percent. Existing-home sales are projected to drop 6.0 percent to 6.65 million this year from a record 7.08 million in 2005, causing sales to equal the third highest year on record, set in 2003. New-home sales are likely fall 10.9 percent to 1.14 million from the record 1.28 million last year – both sectors would see the third best year following 2005 and 2004. Housing starts are forecast at 2.00 million in 2006, which is 3.2 percent below the 2.07 million in total starts last year. The national median existing-home price for all housing types is likely to increase 6.4 percent this year to $221,700, while the median new-home price is expected to rise 2.3 percent to $242,700. Inflation as measured by the Consumer Price Index is seen at 3.4 percent in 2006. Inflation-adjusted disposable personal income should grow 3.8 percent this year, says NAR. But not all economists are as optimistic, perhaps because of the industries they represent. One economist believes that cooling interest in housing by investors, flippers and speculators will be a factor. Diane Swonk, chief economist of Mesirow Financial, in her April issue of Themes on the Economy says that in 2005, when four out of 10 homes were purchased by non-occupying homebuyers including vacation, second-home and investment buyers, "Speculation played a much larger role that we would like, with mortgages used for investment purposes rising to a record-breaking 12.1 percent of the market in the fourth quarter. This leaves us worrying about the magnitude of a market correction, now that cancellations for new homes-largely condos-are on the rise, and speculative investment appears to be cooling." She predicts that the home sales are forecast to slide a little more than 8 percent from 2005 in 2006, with much of the slowdown occurring in the second half of the year. She notes, "Sales actually surged a bit at the start of the year in response to unseasonably warm winter weather, which increased buyer traffic; however, some of those gains are now being given back." Swonk surprises with her forecast that housing starts will drop "at a more aggressive 11 percent rate in 2006 from 2005. The give back to early weather-related drops is expected to be greater for starts than it is for sales." Agreeing with the NAR about a single-digit appreciation in housing, she says, "Median single-family home prices are forecast to rise 7 percent in 2006, a sharp slowdown from the almost unbelievable and unsustainable 12.8 percent pace of 2005, but still respectable ... . Other factors dampening appreciation include: rising energy prices; the Alternative Minimum Tax Rate; and, a push by Realtors to lower sellers' expectations." With consumer spending in mind, she says, "Home buying is the single largest trigger of other types of consumer spending, ... so it follows that it should slow along with housing, which is forecast to do in both 2006 and 2007." When will the effects of the slowdown be felt? Most likely in 2007, not 2006. | 
