Home Sales Retreat As Rising Inventory May Pressure Prices

Sales of new homes in August fell sharply from a July peak to a level that suggests still-hearty demand from buyers. But in a worrying sign for future price gains, for-sale signs continued to sprout.

August sales fell 9.9% to an annualized 1.24 million units, less than expected but still beating last year's levels. Prices gained 2.5%, reversing three straight monthly declines, the Commerce Department said on Tuesday.

Along with Monday's strong existing home report, the latest data portray a housing market that's remarkably robust after several years of record sales.

"The (new home sales) numbers are good, not great, and certainly not bad," Sam Lieber, portfolio manager of the Alpine U.S. Real Estate Fund.

He thinks the market may be peaking. But for now, "we can't draw much of a picture except that it's solid."

More Homes For Sale

Still, the continued build-up of homes for sale could disappoint owners hoping for year-over-year price appreciation to keep topping 10%.

Builders and realtors have frequently cited the thin supply of available homes, especially in hot markets like California and the Northeast, as contributing to the swift rise in home prices. That pressure seems to be easing.

The supply of new homes for sale has jumped to a five-year high of 4.7 months' worth, meaning it'll take that many months to sell all available homes at the current sales pace.

The total number of new homes on the market has reached new records, totaling 479,000 in August. Annual growth in inventories has averaged 17% in the last year. That's a fast clip for an extended period; the long housing boom has made builders very confident.

For-sale signs in older neighborhoods have also become more common, with the supply of existing homes for sale climbing to 4.7 months' worth in August, says the National Association of Realtors. That's the highest in nearly two years.

"The inventory situation implies that at least the tightness of the market we've been accustomed to is loosening up a bit," said Lawrence Yun, an NAR economist. "It indicates home price appreciation will slow going forward."

That said, Lennar (LEN) late Monday raised its 2005 earnings forecast after the builder's backlog ballooned and average sales prices gained 14% in the third quarter.

"A limited supply of available land, especially in constrained markets, continues to limit inventories and speculative building, while generating pricing power going forward," chief executive Stuart Miller told investors.

Still, home builder stocks have been falling for the past two months amid scattered signs of slowing demand. IBD's Building-Residential/Commercial group is 12% off its July 29 peak.

Despite Lennar's good news, its shares fell fractionally on Tuesday, 17% off its July 28 all-time high.

Of note, appreciation of existing homes has recently out-paced new home price growth.

New home prices rose just 1% in August vs. a year earlier, down from 17.1% last December.

But existing home prices surged 15.8% vs. a year earlier, the most since 1979.

That divergence may stem partly from the way Commerce and the Realtors assemble their respective reports. Data from the far-smaller pool of new home sales, which account for only 15% of total sales, tend to be volatile and more subject to revision.

But new-home price growth may lag existing homes if builders expand in more affordable areas or have to cut prices to close sales.

Homeowners, in contrast, can wait for better offers. In many hot markets, they benefit from a lack of significant new housing that would boost supply.

"Prices are softening, which would suggest that developers are compromising price in the interest of moving along excessive inventory," said Richard DeKaser, chief economist at National City Corp. "But it's not conclusive."

Most Homeowners Not Overly in Debt, Fed Chief Says

With new evidence that the housing market remained red hot last month, Alan Greenspan said on Monday that the vast majority of homeowners are not yet stretched too thin. But Mr. Greenspan, the Federal Reserve chairman, warned that the use of ''exotic'' mortgages could be pushing prices higher than what is supportable.

U.S. Aug. existing homes sales rise 2%

Sales of previously-owned homes rose 2% in August to a seasonally-adjusted annual rate of 7.29 million units, the National Association of Realtors said Monday. Sales in July were revised down to 7.15 million from 7.16 million reported earlier. August sales were up 7.8% from August 2004 and were the second highest on record.

The median home sales price rose 15.8% over a year ago to $220,000. Inventories of homes for sale rose 3.5% in August to 2.86 million, a 4.7 month supply and the most plentiful month's supply since November, 2003. David Lereah, NAR's chief economist, said, "Katrina has disrupted everything for us," and it may be several months before realtors will know the full impact of Katrina on the housing market.

U.S. August Housing Starts Fall to 2.009 Mln Rate

U.S. housing starts fell 1.3 percent in August, a second straight monthly decline, as construction on condos and other multifamily dwellings slowed. Starts are still on pace to be the highest since 1973.

Builders broke ground on 2.009 million housing units at an annual rate in August compared with a revised 2.035 million the month before, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell to a 2.124 million annual rate from 2.171 million in July, which was the highest in 32 years.

``This number shows that activity is at least leveling off at a high rate,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Rates are still low and housing is pretty strong,'' said Sullivan, who forecast starts at a 2 million annual rate.

Job growth and 30-year fixed mortgage rates that have held below 6 percent most of this year fueled demand at builders such as Toll Brothers Inc., helping boost economic expansion before Hurricane Katrina struck the Gulf Coast Aug. 29. Economists expect Federal Reserve policy makers, meeting later today, to raise interest rates to keep inflation from accelerating.

At the current rate, starts would grow to 2.045 million this year, the same as in 1973, from 1.953 million last year. August was the fifth straight month starts surpassed 2 million, which hasn't happened since July 1978.

Economists expected starts to decline to a 2.025 million annual rate last month, the median of 59 forecasts in a Bloomberg News survey, from a 2.042 million rate originally reported for July. Estimates ranged from 1.975 million to 2.15 million.

Permits vs. Starts

Permits were expected to fall to a 2.130 million annual rate from 2.171 million in July. The rate of permits has been outpacing that of starts since March, suggesting either that companies aren't able to build homes fast enough to keep up with demand or that builders are cautious about starting homes that don't have buyers, economists said.

Backlogs, or construction that was authorized but not yet begun, rose 5.7 percent to 238,700 units, 22 percent higher than in August 2004, and the most since May 1979.

New construction of single-family homes rose 0.1 percent last month to a 1.709 million-unit pace. Starts of townhouses, apartments and other multifamily dwellings fell to a 300,000 annual rate, the lowest since March, from 328,000 in July.

The drop in starts of multifamily housing may suggest that the market for condos has become saturated, said Joel Naroff, president of Naroff Economics Advisors in Holland, Pennsylvania.

``The only potential indication of softness was a sharp decline in multi-family activity,'' Naroff said in a report. ``Maybe the condo market has become as glutted as many of us believe.''

Rainfall may also have held down starts in August, according to economists including Mike Englund at Action Economics LLC in Boulder, Colorado. August was ninth-wettest season on record in the South, and the sixth wettest in the central U.S., according to the National Climatic Data Center in Asheville, North Carolina.

`Minimal' Hurricane Impact

The hurricane had ``minimal'' effect on housing starts during the month, the Commerce Department said.

In coming months, ``an awful lot of housing units will have to be built, or rebuilt'' to replace those destroyed in the hurricane, Naroff said.

``We just may see some huge increases in the Gulf Coast region that offset any slowdown elsewhere,'' he said.

Starts fell in the Midwest by 5.2 percent to a 346,000-unit rate. They fell in the Northeast by 4.1 percent to a 187,000-unit rate and fell 6.6 percent in the South to a 915,000-unit rate. In the West starts rose by 13 percent to a 561,000-unit rate.

The number of houses already under construction last month rose 1.0 percent to 1.359 million. Housing completions fell 0.2 percent to 1.860 million. Single-family completions fell 4.7 percent to 1.551 million.

New home sales reached a record annual rate of 1.41 million in July, according to the Commerce Department, and the sales pace of previously owned homes that month was the third-fastest on record. New home sales are expected to reach 1.28 million this year, up from 1.2 million last year, according to a forecast from the National Association of Realtors, an industry trade group.

Fed's Actions

The Federal Reserve's 10 straight increases in the overnight lending rate have done little to boost long-term borrowing costs. The average rate on a 30-year fixed mortgage was 5.66 percent in July and 5.82 percent in August, according to Freddie Mac, the second-largest mortgage buyer in the U.S. The rate has risen above 6 percent in only two weeks during the past year, and has stayed within a percentage point of the 40-year low of 5.21 percent reached in July 2003.

The Federal Reserve will probably raise its key interest rate by a quarter point to 3.75 percent later today, the 11th consecutive increase, according to a Bloomberg survey of economists.

Increased hiring and rising incomes are also giving new-home buyers the wherewithal to afford homes even as prices surge, economists said. Employers added 169,000 jobs in August, and the unemployment rate fell to 4.9 percent, the lowest in four years. Personal incomes were up 6.3 percent in July from a year earlier, compared with a gain of 5.9 percent for all of last year.

Driving Forces

``The driving forces of demand for new homes are job growth and population growth,'' said Christopher Clemente, chief executive officer of Reston, Virginia-based Comstock Homebuilding Companies Inc. ``Traffic at our projects remains healthy.''

Toll Brothers, the largest builder of luxury homes, said its backlog of houses ordered rose 38 percent to 9,490 during the three months ended July 31. Toll is based in Horsham, Pennsylvania.

There are signs that some buyers are straining to afford a home, and home price gains may be starting to slow. Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said Sept. 7 that quarterly earnings missed analysts' estimates and gains in sale prices had ``moderated.''

U.S. mortgage delinquencies rose for the first time in a year during the second quarter, and will likely increase more in the wake of Hurricane Katrina, the Mortgage Bankers Association said last week.

Caution Urged

Fed Governor Mark Olson on Sept. 16 urged U.S. lenders to use care with ``non-traditional'' types of home mortgages such as interest-only and adjustable-rate loans, because some borrowers will be ``severely challenged'' to repay them if interest rates rise. Olson made the remarks at a Middle Tennessee State University conference in Murfreesboro.

The surge in energy and building materials prices since Hurricane Katrina struck the U.S. Gulf Coast on Aug. 29 may make builders more cautious in coming months. Crude oil, natural gas, gasoline and heating oil have hit records since Katrina made landfall.

The National Association of Home Builders/Wells Fargo's index of builder confidence this month fell to the lowest since July 2003, the Washington-based association said yesterday. The decline was the third in a row.

``Many builders appear to be taking on a more cautious attitude because of uncertainties in the economy and this post- Katrina environment, particularly with regard to sales expectations in the near term,'' Dave Wilson, president of the builders' association, said in a statement.

Housing Holding Up Even as Growth Slows

Interest rates are still low enough to bolster home construction even as soaring fuel costs after Hurricane Katrina slow the rest of the economy, economists said in advance of reports this week.

Builders probably broke ground on 2.028 million homes at an annual rate last month, keeping construction on pace to surpass last year's total as the highest since 1978, according to the median forecast in a Bloomberg News survey before a Sept. 20 Commerce Department report. The index of leading economic indicators dropped for the first time in five months in August, signaling a moderation in growth is at hand, economists said.

Prices for crude oil, gasoline and natural gas all reached records after Katrina damaged Gulf Coast production platforms, refineries and pipelines. With fuel costs threatening to speed inflation, most economists predict Federal Reserve policy makers will boost their target interest rate this week to 3.75 percent.

``It's the heightened risks posed by energy prices that will likely be Katrina's legacy for the Fed,'' said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto. ``With housing markets still frothy and risks that energy prices could still fuel higher core inflation, we judge the Fed would be more comfortable pausing'' once the rate gets to at least 4 percent, he said.

Central bankers will boost the target rate for overnight loans between banks, currently at 3.5 percent, when they meet in two days, according to the median forecast. It would be the 11th straight increase of a quarter percentage point since June 2004.

Policy makers will raise the rate again in November, taking it to 4 percent, before pausing during this year's final meeting in December, according to Gregory's forecast.

Housing Starts

The number of housing starts expected last month would follow a 2.042 million pace in July and be the fifth straight month in excess of 2 million. The 1.953 million homes started in 2004 were most since 1978.

The Sept. 20 report on home construction is also expected to show that permits, considered an indicator of future building, dropped to a 2.137 million annual pace from a 32-year high of 2.171 million in July, based on the median forecast.

The increases in short-term interest rates engineered by the Fed haven't affected long-term mortgage rates. The rate on a 30- year fixed mortgage averaged 5.82 percent last month compared with an average 6.29 percent in June 2004 when the Fed first raised its target rate, according to figures from Freddie Mac, the No. 2 buyer of U.S. mortgages.

Mortgage Rates

``We still have very low mortgage rates,'' said Angelo Mozilo, chief executive of Countrywide Financial Group, the biggest U.S. mortgage lender, in an interview Sept. 13. ``Supply is still behind demand in most areas of the country. Overall, it's still a very healthy housing market.''

Sales of new homes reached a record 1.41 million annual pace in July, the Commerce Department said last month.

While cheap mortgage rates are still bolstering housing, record fuel prices are souring consumer sentiment and raising concern that Americans may curtail spending.

The University of Michigan's preliminary index of consumer sentiment fell this month to the lowest in 13 years, a report last week showed. It was the sharpest drop since December 1980. The university's measure of consumers' views on the economy's future slumped 13.3 points this month on top of a 8.6-point drop in August as fuel prices soared even before Katrina formed.

Leading Indicators

The index of leading economic indicators due from the New York-based Conference Board on Sept. 22 probably fell 0.3 percent in August, according to the survey median. The decline may be led by the drop in consumer expectations, one of 10 components of the leading index. The leading indicators, which the research group designed to signal how the economy will perform in the next three to six months, last dropped in March.

Another component that already suggests the leading index will decline again this month is the number of first-time claims for jobless benefits. Applications probably soared last week to 455,000, the most in three years, as people thrown out of work by Katrina file, according to the survey median. Claims totaled 398,000 the prior week, 68,000 of which were attributed to workers affected by the hurricane.

The hurricane may cost the economy 400,000 jobs and a percentage point of lost growth in the second half of the year, according to the latest estimate by the Congressional Budget Office.

``Things were really moving along very nicely'' before Katrina struck,'' said Paul Sarvadi, chief executive of Administaff Inc., a Kingwood, Texas-based provider of personnel services, in a Sept. 13 interview. ``The thing we have to be concerned about, of course, is the way that gasoline prices have spiked, and hopefully that won't stay there forever. But we are yet to see the real economic impact there.''

Questions arise as to how U.S. will pay for everything

How are we going to pay for all this?

Before Katrina, we had a budget deficit of $330 billion. The government had to borrow that much to cover the difference between what we took in and what we spent.

We also spent $680 billion more on purchasing foreign goods than foreign buyers spent on our products. This is called the trade deficit. The largest trade deficit is with China at $162 billion, with Japan at $75 billion. How is this being financed? We keep selling debt instruments like Treasury bills, bonds and notes. Please keep in mind that in the early 2000s we had a budget surplus of $263 billion. Adding to our monetary problems is Medicare costs increasing nine percent per year, Medicaid eight percent and Social Security seven percent.

How is the consumer doing with household finances? Americans are no longer saving. According to the Bureau of Economic Analysis, we have gone from the 1950s where we saved eight percent disposable income to now where we have a zero savings rate.
Credit card debt averages $7,200 per household. With regard to credit card debt, the Department of the Treasury has just doubled the required minimum payments on credit card debt. This does not come at a good time for many Americans.

How about real estate? Is there really a "bubble" out there? In some markets, real estate is probably overpriced. However, the main problem lies with mortgage financing. According to Lou Dobbs, CNN news, Americans have $8 trillion in mortgage debt, with 40 percent of this interest only financing (no equity payments).

Katrina will most certainly add to our deficit problems with huge outlays in federal costs. Congress may have to rethink making the temporary tax cuts permanent. Also, the Federal Reserve Bank System may have to postpone another increase in interest rates when it meets next week. Further, we need to understand that there is a limit to our resources, both here at home and abroad.

After Katrina, Calm at the Fed?

In a speech made just prior to the onslaught of Hurricane Katrina, Federal Reserve Chairman Alan Greenspan voiced discomfort with low-risk premiums in "stocks, bonds and, more recently, of homes". Having made previous references to "froth" in the regional real-estate market and been joined by other policymakers in raising concern about the housing juggernaut, the Fed chief made it abundantly clear the central bank's focus was returning to its mandate of containing inflation over sustaining growth.

But has the Fed's view changed in the storm's aftermath? Not likely. In the weeks following Katrina's Aug. 29 landfall, Fed officials have continued to echo concerns about risks of rising core inflation and the housing market.

The Fed chief's trepidation appears to extend to the financial risk from the growth of mortgage giants Fannie Mae (FNM ) and Freddie Mac (FRE). He rebuked Congress for not putting meaningful limits on the housing agencies in a Sept. 2 letter to Senator Robert Bennett, according to The Wall Street Journal.

MINIMAL EFFECT. The storm shouldn't inhibit the sector's long-running expansion. While Katrina has had a devastating impact on the local housing stock in the New Orleans region, rebuilding efforts will have a wider impact in the Gulf region and nationally over time, as demand drives rapid rebuilding.

Past events of lesser magnitude suggest that the housing sector in the affected region will bounce back, though the extensive flood damage has slowed the response to Katrina and will stretch out the recovery period in the immediate region.

As is usually evident with existing and new home sales reports, hurricanes generally depress sales only during the "strike month" -- and even then the impact tends to be restrained, with fairly dispersed experiences in the ensuing months with different hurricanes. With Katrina, we would expect a larger, though more delayed, rebound.

WITHOUT PAUSE. The National Association of Realtors (NAR) raised its housing sector forecasts in the wake of the storm, though it suggested that the rebuilding in the Gulf region would create upward pressure on prices for raw materials more broadly, which may restrain growth.

With a slower rise in mortgage rates, home sales and prices are expected to increase nationally. The NAR estimated that existing-home sales will increase by 3.4%, to 7.02 million, while new home sales will rise 6.7%, to 1.28 million, in 2005 -- both "low ball" estimates in our view, but which are record levels nevertheless.

The group expects home prices to continue their upward path as well. The median existing home price is expected to rise 10.8%, to $205,000, while median new home prices are likely to climb 3.8%, to $229,000, for the calendar year.

STRONG TRAJECTORY. The NAR expects the average 30-year fixed mortgage rate to hit 5.9% by the fourth quarter of 2005 and 6.7% by the end of 2006, vs. the current 5.75%. Taking a macro view, the group sees gross domestic product initially slowing to 2.3% in the third quarter, before rebounding to 2.7% in the fourth and back to 3.8% in 2006.

Our own forecasts at Action Economics reveal a slightly stronger near-term trajectory for housing, GDP, and interest rates, but with a similar profile.

Our third-quarter GDP estimate sits at 3.5%, though we suspect this would have been a 4.4% gain had it not been for a 0.7% subtraction from Katrina, and another 0.2% reduction from the Boeing (BA ) machinists' strike.

GDP BOUNCE. By our estimates, GDP will post 3.9% growth in the fourth quarter, as the lagged effects of Katrina on gasoline prices and sustained dislocations in the New Orleans employment base continue to weigh on economic growth, despite the historic tendency for monthly and quarterly growth figures to bounce quickly after a storm.

We expect a bounce in the first half of 2006 to boost GDP growth into the 4%-4.5% range, as the national economy responds to increased demand for construction materials, equipment, and support services associated with rebuilding in Louisiana and Mississippi.

A recent source of support for the housing market, beyond strength in demand from hurricane victims, has been the recent declines in floating and fixed mortgage rates.

"SIMMER DOWN." Indeed, rates fell for four consecutive weeks until Freddie Mac reported that the 30-year fixed-rate mortgage rose to an average 5.74% in the week ended Sept. 15 -- one basis point below 5.75% in the year-earlier week.

To this point the Fed has been content to indirectly "manage" exuberance in the housing market by warning against laxity and excess by domestic lenders and foreign investors, such as the interest-only, no-down payment schemes combined with adjustable mortgages, which leave borrowers at risk if rates surge.

Greenspan expects the housing boom will "eventually simmer down" of its own accord, and in the process slow consumption growth as home equity extraction (i.e., consumers' borrowing under home equity loans and lines of credit) eases. He doubts the Fed will target asset (home) prices anytime soon, though such prices were already an "integral part" of the Fed's evaluation process.

SIGNS OF A PAUSE? Katrina will give the Fed cover to manage these risks with greater latitude, though it has likely postponed risk of a more aggressive policy stance.

It seems likely the Federal Open Market Committee, the Fed's policymaking arm, will make some sort of sympathetic reference to Katrina's impact in its Sept. 20 statement, which some market players could take as a signal for a pause in the pace of rate hikes.

We still see Greenspan & Co. sticking to its "accommodative and measured pace" -- i.e., more small hikes until yearend. For now, though, it's clear that the robust housing sector -- and the risk of big energy price gains creeping into core inflation -- remain on the Fed's front burner, as much as the near-term fallout from Hurricane Katrina.

SILVER LINING. Tame readings on consumer and producer prices will go only part way to assuaging these concerns, as the Fed will need to look forward to sort through the debris of post-Katrina readings.

One early, discouraging sign: The "prices paid" component of the Philadelphia Fed's September survey of business conditions, released Sept. 15, doubled in the aftermath of Katrina.

Of course, there is one silver lining after the storm's fury: A pick-up in activity in the housing sector, along with falling rates, should help provide a cushion against any hurricane-borne slowdown in the broader economy.

Slowdown? Real estate still going strong

The red-hot U.S. housing market, after a typical summer slowdown, has taken off again and Hurricane Katrina contributed to up-ticks in several localities.

According to the National Association of Realtors, with inventory of homes available for sale across the country so tight anyway, rebuilding the Gulf Coast will place additional pressure on all home prices.

"New home prices will be immediately impacted because of increased construction costs," says NAR economist Lawrence Yun, "and that will filter down to existing home prices as well." That's because as new house prices rise, more homebuyers will consider existing homes, increasing the demand (and prices) for them.

Home sales have already spiked, as has rental demand, in regions surrounding the disaster zone in the Gulf Coast, according to NAR.

Michael Carliner, economist with the National Association of Home Builders, points to increased housing demand in Baton Rouge and Houston, which pre-Katrina, had a large inventory of vacant rental housing. Much of that has now been snapped up, he said.

In Baton Rouge, evacuees have bid up property values by up to 30 percent in just the last week or two. (See that story here.)

But it isn't just a Katrina effect. With home prices having gained so much in the past few years, skeptics have been waiting for what they consider to be an inevitable slowdown, and were quick to point to sluggish activity over the summer.

Those skeptics are still worried, but for the time being, there already are signs that the rally is picking up where it left off.
Florida remains strong

Katrina has had little effect on neighboring Florida markets, except for a trickle of hurricane evacuees in the panhandle area. Some businesses have also temporarily relocated to Tampa and other Florida towns, putting a little more pressure on markets.

Overall though, Sunshine State markets have continued strong and high prices are transforming landscapes. As single-family home costs have exceeded affordability for many Floridians, condo sales have boomed.

That has, in turn, affected the rental market -- investors are snapping up apartment buildings for condo conversion and sending their prices climbing.

Said Matthew Martinez, who owns rental properties in Boston and Florida: "I've looked at 22 apartment buildings in Miami in the past two weeks and bought none. The economics just don't make sense anymore."

Just north of Miami, the situation is much the same. Elena Felipa, vice president of the Corcoron Group in West Palm, said "Lots of apartments are being converted to condos," she says. "There are few rentals around anymore."

Felipa says many recently constructed rental buildings – some just a year or two old – are already undergoing condo conversion.

Area prices have hit $350 a square foot – off the water – and $1,000 a square foot or more for waterfront property, according to Felipa.

That has driven bargain seekers three hours north to the Daytona area, where condos on the Intercoastal Waterway can still be had for $400,000 or $500,000. "You can't touch that in south Florida," said Felipa.
Northern perspective

Manhattan is about as far removed from the disaster in the Delta as one can get in the United States. But the market revitalized during late summer as well, after it paused to catch its breath in July, according to Corcoron's CEO Pam Liebman.

"What we're seeing is that fall is off to a running start, a sprint really," said Liebman. She credits talk of interest rates stabilizing (a possible Katrina effect) for triggering the new "burst of buying, especially in entry level apartments," which in Gotham often means million-dollar, one-bedroom co-ops.

Manhattan's other consistently strong suit this year has been high-end properties. "We have seen very strong buys from the superwealthy, especially hedge fund operators. This year we had more transactions above $10 million than ever," said Liebman.

The wealthy are also out in force on Long Island beach communities, according to Liebman. "In the Hamptons," she says, "the biggest problem is a lack of inventory. Everything available is getting snapped up."

The most expensive homes there, of course, are on the oceanfront. "Near or on the ocean, you're practically setting your own price," she says.

July Housing Starts Continue Strong Pace

New-home construction continued at a vigorous pace in July, the U.S. Commerce Department reported. Housing starts dipped 0.1 percent for the month to a seasonally adjusted annual rate of 2.042 million units following upward revisions to the May and June rates. The pace of starts in July was 2.8 percent above a year ago and remained above 2 million units for the fourth month in a row.

Single-family home construction edged up 0.5 percent to a pace of 1.711 million units for the month. This was 3 percent above the pace of a year ago.

“Builders are working hard to keep up with buyer demand,” said Dave Wilson, president of the National Association of Home Builders (NAHB) and a custom home builder in Ketchum, Idaho. “Even though mortgage rates have edged up in recent weeks, they are still very affordable and continue to fuel the housing market.”

“The fundamental supports for housing demand are still in place,” said NAHB Chief Economist David Seiders. “Financing conditions remain favorable, job formation is fueling household growth and ongoing increases in house values and bolstering the ownership of single-family homes and condo units.”

Three of four regions reported an increase in housing activity for the month. In the Northeast, construction of new homes and apartments rose by 6.5 percent in July. The Midwest was up 9.1 percent and the West increased by 2.1 percent. The pace of construction decreased in the South by 5.4 percent.

Multifamily housing starts dropped by 3.2 percent for the month, but the seasonally adjusted pace of 331,000 units was 1.8 percent above the pace of a year ago.

Issuance of total building permits increased 1.6 percent to a seasonably adjusted rate of 2.167 million units for the month. Single-family permit issuance was up 2.0 percent to a record pace of 1,686 million units for the month. The pace of multifamily permit issuance was up 0.4 percent.

Seiders noted that the backlog of unused permits was historically high at the end of July, particularly in the single-family sector. “Builders have accumulated an unusually large supply of permits in order to meet future housing demand in markets with serious supply constraints. That bodes well for housing production in the near future,” he said.

Hurricane Katrina Impact Mixed for Economy and Housing

The direct housing needs for evacuees of Hurricane Katrina and lower interest rates that will soften its economic hit mean there will be long-term consequences for housing as well as the overall economy, according to the National Association of Realtors(R).

David Lereah, NAR's chief economist, said shortages of building materials, made worse by the need to rebuild in areas hit by Katrina, will increase construction costs. "Given the general tight inventory of homes available for sale across the country, rebuilding in the region of the Gulf Coast will place additional pressure on overall home prices," Lereah said. "As displaced residents try to get back on their feet in new locations, home sales have spiked -- along with rental demand -- in regions surrounding the disaster zone."

Existing-home sales are expected to increase 3.4 percent to 7.02 million this year, while new-home sales are forecast to rise 6.7 percent to 1.28 million for 2005 -- both would be records. Last month, the totals were projected to be 6.98 million and 1.26 million respectively. Total housing starts -- single-family and multifamily -- should grow by 4.8 percent to 2.04 million units this year, the highest since 1973; single-family starts are expected at a record of 1.69 million.

"Mortgage interest rates will rise more slowly as a result of post-storm economic conditions to accommodate the losses of homes, jobs and businesses," Lereah said. "The lower level of borrowing costs will provide additional lift to home sales in other regions. Demand will continue to outstrip supply in most areas, which will keep pressure on home prices." Total housing, commercial and public property losses by Katrina are in the range of $100 billion.

The 30-year fixed-rate mortgage is forecast to rise more slowly, reaching 5.9 percent in the fourth quarter, and 6.7 percent by the end of 2006. The national median existing-home price for all housing types is projected to rise 10.8 percent in 2005 to $205,100. With a greater concentration of construction in lower cost areas, the median new-home price should increase 3.8 percent to $229,300 this year before rising at a faster clip of 6.2 percent in 2006.

NAR President Al Mansell of Salt Lake City said the association is focused on people displaced by the storm. "The Realtors(R) Relief Foundation is providing emergency relief for hurricane victims," he said. "Working with our state and local associations, this is helping to provide immediate shelter needs and essential supplies. We connect very strongly with these needs because 28,000 of our own members have their lost homes and businesses."

The foundation has already collected nearly $2.8 million for relief efforts; NAR is absorbing all administrative costs to provide emergency relief for hurricane victims in Louisiana, Mississippi and Alabama, including displaced Realtors(R). Many Realtor(R) associations throughout the region have developed a special information template that members can use to forward information to the federal government about available inventory that could be used to house people displaced by the storm.

It is estimated that most of the flooded homes will have to be rebuilt, including about 80 percent of the homes in the city of New Orleans. Along with homes that will have to be replaced along the Mississippi and Alabama coastline, a minimum of 200,000 homes have been lost. However, the level of new housing construction will be only 130,000 higher than pre-Katrina projections.

"Housing construction will be insufficient to replace the number of homes destroyed or that will have to be demolished," Mansell said. "Apartment vacancies are dwindling, and mobile homes will help to address the jump in housing needs." He is meeting with Realtors(R) and member associations in the Gulf Coast region this week to present relief checks and to assess long term consequences.

The Louisiana Realtors(R) Association has launched http://www.HurricaneHousing.net. Realtor(R) members and property owners alike can submit data on available shelter in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi and Texas, and people displaced by the hurricane can search the database directly.

The storm's impact will cause the economy to grow more slowly than in earlier projections, but the economy will get a lift once rebuilding gets under way. The U.S. gross domestic product is forecast to grow at a pace of 2.3 percent in the third quarter and 2.7 percent in the fourth quarter, with GDP for all of 2006 pegged at 3.8 percent.

The unemployment rate is seen to peak at 5.3 percent during the first half of next year before declining in the second half. The Consumer Price Index is expected to increase 3.5 percent this year, while inflation-adjusted disposable personal income should grow by 1.4 percent. The consumer confidence index is likely to dip to 100 early next year, and then rise to 107 by the end of 2006.

The National Association of Realtors(R), "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

NOTE: The commercial real estate forecast news release has been postponed for additional analysis of the hurricane impact until September 14.

The next existing-home sales release will be September 26; the Pending Home Sales Index is scheduled for October 5; and the next forecast will be October 12.

A National Association of Realtors chart on "U.S. Economic Outlook: September 2005" is available online at:

http://www.realtor.org/Research.nsf/files/currentforecast.pdf/$FILE/currentforecast.pdf (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.)

Decoding the Data from Katrina's effects.

Starting two weeks ago, the federal goverment and trade groups released seemingly contradictory data on the state of the housing market. Hurricane Katrina created more confusion about whether this is a good time to buy or sell. There's no simple answer, but here's how economists we contacted decoded some of the signs:

FACT: 30-year fixed-rate mortgages have dropped to 5.64 percent, the lowest level since mid-July.
BUY: Y
SELL: N
REASON: The Federal Reserve may hold off trying to raise interest rates, at least temporarily, if Katrina's economic impact curbs inflation fears.

FACT: Gasoline prices have risen to $3.03 a gallon, from $2.34 a month ago; prices will probably remain high in the near future.
BUY: N
SELL: Y
REASON: Rising prices reduce buyers' purchasing power, and eventually may lead to layoffs that shrink the buyer pool.

FACT: New-home prices fell to $219,500 in June from a record $237,300 in February 2005.
BUY: Y
SELL: N
REASON: New home prices may rise again if Katrina rebuilding efforts siphon off materials and manpower, constricting supply.

FACT: Existing-home prices reached a record $218,000 in July.
BUY: Y
SELL: N
REASON: Prices rose at their fastest pace in 25 years earlier this year, and could go higher.

FACT: Existing-home sales dropped 2.6 percent in July from the month before.
BUY: N
SELL: Y
REASON: It's a sign that the ferocious sales pace of the past year has started to cool.

FACT: The Pending Sales Index, the National Association of Realtors' measure of homes that are under contract, dropped 1 percent, to 125.1, in July.
BUY: N
SELL: Y
REASON: Although the index level is still high, the drop is a sign that cooling could continue.

Katrina complicates the home-selling dilemma

For months, Richard and Sher Pestino have watched real-estate prices in their neighborhood in Loomis, Calif., climb toward, and pass, the $1 million mark. But it was only this week that the couple decided to sell their own four-bedroom house.

Among the deciding factors: A neighbor's home wasn't selling, leading them to believe the market was cooling. Then came a series of confusing economic indicators, and Hurricane Katrina. "We decided it's time to be sensible," says Mrs. Pestino, an office manager for a venture-capital firm.

Homeowners who've been trying to pick the right time to sell are grappling with a new set of questions. Over the last two weeks, as Katrina reeled through the south, a less-noticed array of at-times contradictory economic data were also released. On one hand, median prices for existing homes climbed at a record pace, and mortgage rates last week dropped yet again. On the other, according to a report issued Aug. 23, existing-home sales declined in July, the second time this year. Rising oil prices, meanwhile, could result in lower interest rates that would keep the boom going -- or could prompt a recessionary trend.

The optimistic view, held by economists such as David Lereah of the National Association of Realtors, argues that housing prices could continue to grow. In July, for example, existing-home prices rose to a record median price of $218,000. In the second quarter of 2005, 24 states and the District of Columbia showed double-digit annual price growth, according to the Office of Federal Housing Enterprise Oversight. Indeed, Katrina has had the surprising effect of lowering mortgage rates, a development that's likely to keep people buying houses. The bond market has pushed down the long-term rates on which mortages are based, partly because it expects the Federal Reserve to be less aggressive in raising rates despite some jitters about inflation. For the week ending Sept. 2, the average contract rate for a 30-year fixed rate mortgage was 5.64 percent, down from 5.78 percent two weeks earlier, according to the Mortgage Bankers Association.

Yet the more pessimistic feeling among other economists is that the rapid home-price growth over the last eight years is winding down. In July, existing-home sales dropped 2.6 percent, while new-home prices in June fell to $219,500, from a record $237,300 in February 2005. As of Aug. 26, the Mortgage Bankers Association reported that its index of demand for mortgages used to purchase homes was 470.6, down 11 percent from the peak of 529.3 in June.

All of that has prompted Michael Aston to begin researching an asking price for his 80-foot-by-120-foot canal-front lot in Punta Gorda, Fla. The retired businessman worries real-estate prices have climbed too high in the area -- prices overall in the neighborhood have increased almost 30 percent since June 2005 -- and about future hurricanes. Though he hasn't decided whether to offer the lot now or to wait until January when the "snowbirds" start heading south for their vacations, Mr. Aston says he's committed to selling, because "a nosedive is possible." He's also begun receiving entreaties from brokers: One, the 58-year-old says, offered to cut his 10 percent commission to 4 percent.

In San Diego, economic indicators coupled with the impact of Katrina prompted Robert Campbell to take a different tack. Watching news accounts of the storm, Mr. Campbell, an economist and self-employed investor, became convinced that the post-Katrina landscape included high oil prices that would slow job growth and prompt a recession. In this scenario, he concluded that homeowners would cash out of high-priced areas and move to more affordable ones. After identifying Austin, Texas, as one likely destination, Mr. Campbell began calling fellow investors, looking to raise $3 million to buy raw land in Austin. His plan: Buy up land at $10,000 an acre, spend about $300,000 subdividing it, then sell it for $20,000 an acre to homebuilders. "I think things are ripe for a correction," says Mr. Campbell.

In spite of worries about Katrina's immediate impact, over the long term, some economists say that high oil prices may well be the factor that puts the brakes on soaring home prices. Since the Gulf of Mexico supplies about one-fourth of U.S. demand for oil, Katrina's devastation has already yielded higher oil prices. That will make it more expensive to produce and transport building-related materials, from windows to drywall.

Muddling the picture further: the rebuilding of New Orleans, which will attract construction workers for months or years, and take them away from other parts of the country. That may cut into the supply of new homes that can be built elsewhere, says William C. Young, an economist in Arlington, Va., and as supply shrinks, prices will rise.

For sellers in the nation's hottest housing markets, the thought that the peak may have passed is sobering. In the suburban Washington, D.C., market, the number of contracts for single-family homes fell 8.9 percent in July from the year before. Brokers who used to oversee bidding wars of houses that hadn't had a makeover in decades are now pushing sellers to fix up their places to sell faster.

Vivian Donahue says she encouraged one client in Falls Church, Va., to spend $6,000 to put in new carpeting and refinish her hardwood floors, to compete with similar homes nearby that had been on the market for weeks. "You wouldn't have had to do this a year ago," she says. Her client's spruced-up house sold in a few days at a little more than its $475,000 asking price; the others are still for sale.

In Cape Cod, broker Jack Cotton says things have changed since a year ago, when prices were in a "frenzy" and he was advising clients to price their homes at or slightly above the market. Following Katrina, he's expecting a slowdown, at least in the short run, and has started telling sellers to price about 5 percent below the asking price of comparable homes that have sat on the market for at least a month. "That will create urgency," he says. For sellers who don't want to lower their prices, he's recommending they pull their homes off the market for at least a year, when he expects the national economy to have recovered from Katrina's effects.

Pending Home Sales Index Slips, Remains High Says NAR

Pending home sales declined slightly but remain historically high, according to the National Association of Realtors(r).

The Pending Home Sales Index (see note), based on data collected for July, slipped 1.0 percent to a reading of 125.1, but is 3.5 percent higher than July 2004.

The index, a leading indicator for the housing sector, is based on pending sales of existing homes. A sale is pending when the contract has been signed but the transaction has not closed; pending home sales typically close within one or two months of signing.

David Lereah, NAR's chief economist, said the level of the index is more important than minor shifts in direction. "The Pending Home Sales Index is at the fifth highest reading on record, meaning we can expect historically high home sales to continue in the months ahead," he said. "The index has been fluctuating in a fairly narrow range over the last six months -- a very high range -- so the overall market is moving forward with a lot of momentum."

An index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed. Coincidentally, 2001 was the first of four consecutive record years for existing-home sales. 2001 sales are fairly close to the higher level of home sales expected in the coming decade relative to the norms experienced in the mid-1990s. As such, an index of 100 coincides with a historically high level of home sales activity.

Regionally, the Pending Home Sales Index (PHSI) in the South rose 1.2 percent to record of 139.2 in July and was 8.3 percent higher than July 2004. The index in the West slipped 1.1 percent to a reading of 127.5, but was 4.7 higher than a year earlier. In the Midwest, the index declined 3.1 percent to 113.6, and was 2.5 percent below July 2004. The Northeast index fell 3.7 percent to 109.0 in July, and was 0.8 percent lower than a year ago.

The National Association of Realtors(r), "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

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NOTE: The Pending Home Sales Index is based on a large national sample, representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 closely parallels the level of closed existing-home sales in the following two months.

Existing-home sales for August will be released September 26; the next Pending Home Sales Index will be on October 5.

------ Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the Web site's "News Media" section in the NAR Media Center. Statistical data, charts and surveys also may be found in the NAR Media Center by clicking on Economic & Housing Statistics.

REALTOR(r) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS? and subscribe to its strict Code of Ethics.