Real estate market may come down to earth

The US residential real estate sales market is likely to cool somewhat in 2005, experts say. But given the scorching temperatures of the market in 2004, the relief probably won't be very noticeable to first-time buyers and first time homebuyers who are shopping for a home.

Mortgage interest rates are expected to remain low by historical standards, but buyers are likely to have a little more inventory to choose from as the sizzle begins to moderate following four years of record-breaking home sales.

The residential housing market probably will reflect this year's nationwide trends: less incentive for potential buyers to make the leap into new mortgages, which translates into less demand for builders and sellers to bring property onto the market.

And after the recent frenzy, there may simply be a dearth of financially qualified people still looking for homes to buy.

Mortgage interest rates - which were still hovering just above 5.6 percent this month on 30-year fixed-rate loans - are forecast to rise by anywhere from a half percentage point to a full percentage point-plus by the end of this year.

Frank Nothaft, chief economist for Freddie Mac, said last month during a conference call with analysts that he expects a 0.5 percent increase in the 30-year rate this year.

Mortgage interest rates usually follow interest rate trends set by the Federal Reserve Board, which is expected to raise its rates in quarter-point increments at least through the first half of 2005.

But mortgage rates are actually determined by corporations such as Freddie Mac and Fannie Mae, which sell bonds to pay for the mortgages they purchase from brokers. Interest rates on the bonds - known as mortgage-backed securities - are affected by inflation concerns such as interest-rate hikes by the Fed, plus national and global demand for money.

"We expect another very strong year for housing in 2005, with above-trend economic growth and still-low mortgage rates," David Berson, the chief economist for Fannie Mae, said during a conference call with analysts last month.

"A combination of `buying ahead' behavior in the past couple of years and a slowdown in the rapid pace of investor demand should reduce home sales by roughly 7.5 percent this year," he added.