Existing home sales slowing

Sales of existing homes fell to an eight-month low in November, leaving the number of houses on the market at the highest since 1986 and suggesting one pillar of the economy will weaken next year.

Home sales dropped 1.7% to a 6.97 million annual rate, the National Association of Realtors said yesterday. Mortgage rates are higher than a year ago and the report showed the median price rose 13.2% since November 2004 to $215,000, making homes less affordable.

The housing slowdown means the world's largest economy may have to depend more on businesses and less on the consumer next year.

A weaker housing market "suggests that consumers won't feel as wealthy and may pull back the reins a bit on spending next year," said Gina Martin, an economist at Wachovia. "Business spending will help make up for the moderation in consumer demand."

The housing industry accounts for only about 5% of the economy and yet generated half of the growth in this year's first six months and more than half of the private jobs added since 2001, Merrill Lynch said in an August report. Price appreciation helped the value of homes climb by $5.2 trillion during the current expansion, or 68% of all wealth creation, according to the Federal Reserve.

Existing-home purchases, which account for about 85% of the residential real estate market, slowed in all four regions and are down from a record 7.35 million pace in June. New-home sales fell 11% in November, the most in 11 years, the Commerce Department said Dec. 23

"Housing activity has peaked," said David Lereah, chief economist at the Realtors group, which predicts sales of previously owned homes will fall to 6.84 million in 2006 from a projected record 7.1 million this year.

The supply of existing homes for sale, another measure of housing demand, increased to 2.9 million in November, the highest since April 1986.

Fed deals another rate hike

As with the 12 that came before it since June 2004, the impact of Tuesday's 13th hike in the federal funds rate - which banks charge each other for overnight loans - was difficult to gauge, local experts said.

"I don't think we've really seen the full effects of the increases over the past year, because some things just don't change immediately," said Stephen G. Hoffmann, president and CEO of Palm Springs-based Canyon National Bank.

Local observers do agree on a number of likely cumulative impacts from the Federal Reserve's increases. The latest hike takes the funds rate from 4 to 4.25 percent, the highest level in 41/2 Fed signaled that the campaign to raise interest rates to fight inflation was likely drawing to an end.

Lending tied to the prime rate, such as credit card debt, will likely be the first to rise, following patterns from previous Fed hikes. Hoffmann noted that business lines of credit - which are short-term and pegged to the prime rate - could also be impacted.

"You have lines of credit that may have cost 5 percent a year and a half ago, and they could be going to 8 percent now," Hoffmann said Tuesday. That could eventually prompt, for example, companies nationwide to reconsider staffing needs or future building projects.

Hoffmann emphasized, however, that valley growth is currently keeping construction and other existing business sectors going strong.

Another expected impact will be on those holding adjustable-rate home loans - whether in conventional loan packages or the increasingly common "exotic" loans that have emerged over the past two years. Those newer type loans, offered and heavily advertised by various lending companies, carry features like 40-year terms and temporary introductory rates as low as 1 percent.

Traditional local institutions like Pacific Western Bank do not generally offer the exotic packages. But Pacific Western president and CEO William Powers, said the impact of those loans could arrive in late 2006, as borrowers see their teaser rates come to an end and higher adjustable rates kick in.

"Say you had somebody who took the savings from the introductory rate and bought a BMW," said Powers. "When that introductory rate ends, he's got the higher rate on the home loan, plus he's got to pay for that BMW."

US economic forecasts

As the apparent incoming head of the Federal Reserve Board, Dr. Ben Bernanke has a tough act to follow. Chairman Greenspan has been perhaps the most successful Fed chairman in history, with inflation remaining calm and with only two mild recessions in 18 years. On the positive side, the incoming chairman inherits an economy that is stable, with low inflation and solid growth. But the problems and imbalances he must deal with are big.

First on the central bank's agenda is always inflation, and the sharp rise in energy prices and construction cost increases caused by the rebuilding of New Orleans has brought that to the fore again. In his academic work and at the Fed, Dr. Bernanke was known as an advocate of inflation targeting. We expect him to move gradually toward that policy as Chairman.

Second has to be the dependence of the U.S. financial market on foreign capital to finance our deficits. The lack of household saving (now negative for a record four months) and rising federal deficit in the wake of Katrina makes us dependent on this massive inflow of private and official money. What happens if foreigners stop shipping us all their spare cash?

The third item on the agenda is the heavy borrowing of the household sector and the related housing boom, which has enabled that borrowing. Household debt is at a record 124% of household after-tax income. The new bankruptcy law and Katrina have created a flurry of bankruptcies, as debtors filed before the new law became effective October 16. Charge-offs will peak in the fourth quarter as a result.

Realtors Association says housing sales will fall in '06

The National Association of Realtors says next year's housing sales won't break 2005 records but should still be the second-highest on record.

It also expects rising prices to cool considerably in 2006.

The Washington-based group's new forecast calls for new-home sales to fall 4.8 percent next year. Existing-home sales, which account for about 85 percent of housing sales, will fall 3.7 percent in 2006, the NAR says.

"The slowdown amounts to a tapping of the brakes on a hot market," says NAR chief economist David Lereah. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau -- a plateau that is higher than previous peaks in the housing market."

The group also expects 30-year mortgages to rise to an average of 6.6 percent in 2006, and the median price of existing homes to rise 6.1 percent, half the pace of housing appreciation during the last 12 months.

Housing sales for 2005 are on track for the fifth consecutive record, with new- home sales likely to hit 1.29 million and existing-home sales to reach 7.1 million this year.

Pending Home Sales Index Shows Market Easing

The Pending Home Sales Index(a), a leading indicator for the housing market, is trending lower, according to the National Association of Realtors(R).

The index, based on contracts signed in October, dropped 3.2 percent to a level of 123.8 from a reading of 127.9 in September, and is 3.3 percent below October 2004; the current reading is the lowest since March of this year.

The index is based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, and the sale is usually finalized within one or two months of signing.

David Lereah, NAR's chief economist, said a decline was expected. "The drop in pending home sales is an affirmation that we are experiencing a modest slowing in the housing sector," he said. "The index is pointing to a soft landing for home sales, which will help to correct the inventory shortages that have dominated housing over the last five years. This should restore balance to the market."

A Pending Home Sales Index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed, and was the first of four consecutive record years for existing-home sales. Sales in 2001 were fairly close to the higher volume of home sales expected in the coming decade, well above the levels that were seen in the mid-1990s, so an index of 100 is considered to be historically strong.

NAR President Thomas M. Stevens from Vienna, Va., said it's important to look at the index from a broader view. "The level of home sales activity remains quite strong from a historical perspective," said Stevens, senior vice president of NRT Inc. "It's unrealistic to expect continuous records or to sustain double-digit home price gains. People shouldn't interpret a market that is returning to equilibrium as something that's undesirable - this will be good for the long-term health of the housing sector by taking excessive pressure off of home prices."

Regionally, the PHSI in the West rose 0.8 percent in October to 134.8, but was 2.0 percent below October 2004. In the South, the index was down 2.5 percent to 135.4 in October but was 1.2 percent higher than a year ago. The Midwest index dropped 6.3 percent to 112.2, and was 10.2 percent below October 2004. The index in the Northeast fell 6.9 percent to 101.8 in October, and was 6.4 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 1.2 million members involved in all aspects of the residential and commercial real estate industries.

(a) The Pending Home Sales Index is based on a large national sample, typically 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.

Housing Starts Down 5.6 Percent in October

Privately-owned Housing Starts in October were at a seasonally adjusted annual rate of 2,014,000, a 5.6 percent decline from September's figure of 2,219,000. Single-family housing starts in October 2005 were at a rate of 1,704,000, 3.7 percent below September.

Building permits issued also declined in October. Overall permits issued totaled 2,071,000, a 6.7 percent decline from September. Of those, single family permits were 1,681,00, a decline of 4.9 percent.

"Builders continue to operate at a very healthy pace, but we are well aware that some slowing of demand is inevitable following the record-breaking sales activity that has prevailed recently," said Dave Wilson, president of the National Association of Home Builders (NAHB) and a custom home builder from Ketchum, Idaho. "NAHB's November survey of single-family builders showed a significant slowdown of sales activity."

"It appears that housing starts and permit issuance hit their peaks during the third quarter and that housing market activity has begun to cool," said NAHB Chief Economist David Seiders. "Rising house prices and interest rates have combined to erode housing affordability and consumers also appear to be concerned about the cost of heating their homes this winter."