US existing home sales hit record for fifth straight year

Existing home sales in the United States totaled 7.072 million units in 2005, setting a record for the fifth consecutive year, the National Association of Realtors (NAR) reported Wednesday.

The sales reading for last year was up 4.2 percent from the 6.784 million homes and condominiums sold in 2004.

In the final month of last year, however, sales of previously-owned homes and condominiums fell by 5.7 percent from November. That was the third monthly decline in a row.

By region, existing home sales in December dropped by 11.4 percent in the West, 7.2 percent in the South and 2.6 percent in the Midwest. Sales in the Northeast kept unchanged.

The median price of an existing home, a typical market price where homes are sold half for more and half for less, was 211,000 in December. For all of 2005, existing home prices rose by 12.7 percent, the biggest advance since a 14.4 percent gain in 1979.

NAR's chief economist David Lereah believes that increases in home prices are expected to slow this year as sales drop by about six percent. This would represent a cooling housing market but not a collapse as some analysts had feared, he said.

As speculators go, so goes area housing market

The future of metropolitan Phoenix's housing market comes down to investors. Again.

These speculative home buyers hyperinflated prices in 2005 by at least 25 percent with their purchasing sprees, new research shows. And what they do this year will determine whether the Valley's housing market sags, keeps climbing or stabilizes.

Forecasts call for everything from a 10 percent increase in Valley home prices to a 10 to 15 percent drop.

"In a normal housing market without the froth that investors brought, Valley home prices wouldn't have climbed nearly as high," said Jay Butler, director of the Arizona Real Estate Center at Arizona State University Polytechnic. His research indicates that the median price for an existing home would have likely hit a high of $205,000 last year, rather than the $263,000 it peaked at in September.

Population and job growth have been the key indicators of metro Phoenix's economic growth in the past, but this year, what home investors do will be another important trend. Because housing is the Valley's biggest industry, the area's economic growth will slow if housing does.

"Phoenix is going to burn off some investors during the first half of this year," said John Burns, a national real estate consultant. "We will see how many investors can't hang on and need to sell. As long as a bunch don't start dumping, the market will be all right."

Investors accounted for at least 25 percent of all Valley home buyers last year, according to property records and real estate agent reports.

But some economists think the figure is even higher. Frank Nothaft, chief economist for mortgage giant Freddie Mac, said investors accounted for 30 to 35 percent of all home sales in metro Phoenix last year. Nationally, the rate was 23 percent. Las Vegas, where investors have started to pull out and cause home prices to dip in some new neighborhoods, had a higher rate than the Valley.

If investors slash home prices to sell, there will be pressure on all Valley home prices. A glut of houses on the market also will cut into demand for new homes, which will affect building and construction jobs.

As home prices have flattened, many investors have tried to find renters instead of buyers for their properties. If people keep moving to the Valley as projected, most investors should be able to find people to lease their homes.

A slowdown in home-price increases isn't necessarily bad because it keeps metro Phoenix from following California cities such as San Diego and San Francisco, which are losing jobs and residents because of high housing costs.

Most market watchers believe the most-speculative investors have already cashed out of metro Phoenix's housing market, moving on in search of the next big deal. The number of home buyers acknowledging that they are buying houses as investments fell in December. The percentage of new homes selling to investors dropped from a high of 11 percent last January to 5 percent at the end of the year, according to the Information Market, a Phoenix-based data firm. About 18 percent of all used homes were selling to investors in December, compared with a high of 20 percent in September.

Last spring, at the peak of the investor frenzy in the Valley, home sellers were getting multiple offers, and many were above appraised values. First-time buyers, fearing prices would keep climbing, jumped in and used all types of creative mortgages to afford a home. Homes priced right were selling in days.

Then, late last summer, the frenzy started to subside as investors began to sell. Deals for overpriced homes began to fall through as some investors started looking to other regions for affordable homes with big appreciation potential or they abandoned real estate altogether in favor of the stock market.

Valley home listings have climbed from a low of about 6,000 in February to 30,000 now. Prices dipped in some areas late last year as the number of homes for sale rose. Now, it's taking at least 10 days longer for houses to sell than it did a year ago.

As investors cash out of the housing market, it could slow even more, according to a forecast this month at the National Association of Home Builders conference in Orlando.

Not all investors are the stereotypical out-of-state buyer purchasing three or four Valley homes with small down payments all at once, often without even seeing them. Many locals tapped equity in their own homes to buy others, often using interest-only or other adjustable-rate mortgages. Other investors bought one home to live in but counted on the property to appreciate quickly so they could sell.

"Speculators bid up home prices beyond economic fundamentals," said Marshall Vest, an economist and director with the Economic and Business Research Center at the University of Arizona's Eller College of Management. "Long-term investors don't bring that type of problem because their purchases aren't as volatile."

Housing Starts Decrease 8.9%

New home construction tumbled in December, pointing to further cooling in the U.S. real estate boom, but other figures Thursday showed a robust labor market as new jobless claims fell to a six-year low.

A third report on regional manufacturing revealed an unexpected stalling in factory activity in the Philadelphia Federal Reserve's Mid-Atlantic district, despite an improvement in new orders.

Analysts said the figures showed moderate economic growth that was unlikely to deter the Federal Reserve from raising interest rates again in late January, despite mounting evidence of a slower housing market.

"I don't think these economic numbers we've seen change prospects for Fed policy. We still look for another quarter [percentage] point rate hike at the end of the month," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc.

The Commerce Department said housing starts fell 8.9% in December to an annual rate of 1.933 million units, led by a decline in construction of single-family homes.

That was below the pace of 2.050 million units anticipated on Wall Street, though economists said unseasonably cold winter weather contributed to the decline.

"The long-awaited drop-off in housing activity may have started," Lehman Bros. economist Drew Matus said.

A separate report from the Philadelphia Fed said factory growth nearly stalled in January, with its business activity index sliding to 3.3 from 10.9 in December.

That was well short of Wall Street's forecast of a rise to 12.6.

It was the weakest reading since June, although key components of the index showed signs of strength.

"Businesses are toning down their expectations with investment and hiring this year," said Joel Naroff, president of Naroff Economic Advisors.

Analysts said the housing data signaled that a slowdown was clearly underway. Many economists have been looking for a slow, steady moderation in the market to bring price gains and investment back to levels seen as more sustainable.

For the year as a whole, starts rose 5.6% to 2.065 million units — the second-highest on record. The highest came in 1972.

Housing starts have fallen in two of the last three months. In December, starts plummeted throughout most of the U.S.

A 21.7% drop in the West marked the biggest percentage decline for that region since February 1999, when starts dropped 24.7%.

Total single-family starts dropped 12.3% in December while groundbreaking on multifamily units jumped 10.2%.

Permits for future groundbreaking, an indicator of builder confidence, fell 4.4% in December.

A separate report suggesting a robust labor market showed that the number of U.S. workers making new claims for unemployment benefits fell unexpectedly last week to the lowest level in nearly six years.

Existing-home sales fall 30% in Sacramento, Calif.

Sales of existing homes in the capital region fell 30% in December compared with a year ago, but the market also showed signs that it's beginning to right itself.

The inventory of homes on the market dropped 21% over the past two months, to 8,525 homes as of Dec. 31, reports TrendGraphix, a local real estate data firm. Fewer homes on the market means less competition for sellers and less choice for buyers.

But offsetting the tighter market last month was a substantial decline -- 30% -- in sales compared with record resale activity in December 2004. The 2,392 homes that resold in Sacramento, Placer, El Dorado and Yolo counties in December was the lowest sales total for that month in four years, DataQuick Information Systems reported Thursday.

The market gave mixed signals on home prices: The median sale price fell for the fourth consecutive month in Sacramento County, to $355,000, marking a 4.6 decline from a peak of $372,000 in August, DataQuick said. Yolo County saw its median price decline slightly last month, to $410,000, from November.

But Placer and El Dorado counties saw small gains in their median resale prices to $485,000 and $455,000, respectively.

Experts are divided over what the four-month decline in Sacramento County means. Some view it as evidence home values are falling across the board. Others say the decline would have to continue into the spring to know for sure.

One thing is clear: The market has softened in the region for the priciest homes. In El Dorado County, for example, it would take nearly 3.5 years to sell the 122 homes priced $1 million or more at December's sales pace, TrendGraphix data show.

Still, in each of the region's four counties the December median remained 11 to 20% higher than a year ago.

The big question is whether the recent decline in the number of homes for sale marks the beginning of a sustained tightening trend. One possibility is that it was simply the result of sellers pulling their homes off the market for the holidays in hopes of a stronger market in the new year.

Tim Yee, executive vice president of RE/MAX Gold in Sacramento, said he doesn't expect to see most of those homes back on the market.

"A lot of sellers were just testing the market to see what they could get," he said.
Veteran Sacramento agent Carlos Kozlowski of Coldwell Banker chalked up much of the inventory decline to investors cashing out here to re-invest elsewhere.

"The investors who needed to sell have put their property on the market and they have sold," he said.

Agents say one upside to the slower market is that fewer first-time buyers have to compete with investors for entry-level homes.

First-time buyer Darius Sharpe said he feels like he got a good deal last month on a two-bedroom, one-bath condo that an investor was selling in south Sacramento, near Florin Road and Franklin Boulevard. The seller dropped the price from $135,000 to $125,000, he said -- then dropped it again after the unit appraised for $120,000, which is what Sharpe paid.

A native of the Napa area, Sharpe, 22, found Sacramento a bargain after shopping for homes last year in Fairfield. He says a similar condo in a similar neighborhood would sell there for more than twice as much. A paramedic, Sharpe now commutes to work in Vallejo.

"Prices are way too high for a 22-year-old guy to even rent" in the Bay Area, Sharpe said.
Many experts say it's unlikely Sacramento's housing market will see a severe decline in home values as long as it continues to draw Bay Area buyers. Analysts also point to the region's continued job growth and relatively low mortgage rates as reasons the market won't tank.

Still, most do see Sacramento's market losing steam. They predict modest, if any, price appreciation over the next year or two. Evidence is mounting that home values are dipping a bit in some areas, especially for ones priced over $500,000.

The region's upper-end market is "overbuilt and may take years to recover," Michael Lyon, head of Lyon Real Estate in Sacramento, stated this week in his monthly written commentary on the housing market.

Lyon's TrendGraphix data firm reports that in December there was a 17-month inventory of homes priced over $1 million in the four-county region. That's how long it would take to sell all of the homes on the market at the current sales pace. There was a 6.5-month inventory of homes priced $750,000 to $1 million.

Experts consider an inventory greater than six months an indication that the market favors buyers in negotiations.

"Those high-end homes are already softening in price, but the $400,000 homes are going to hold their own (in value)," contends economist Sean Snaith, director of the Business Forecasting Center at the University of the Pacific in Stockton.

Last month there was a 4.5-month inventory of homes priced $400,000 to $499,000, which put that price category in "neutral" territory. That means neither buyers nor sellers enjoyed a clear advantage in negotiations, TrendGraphix reports.

Hike in loan limits can lower rate for borrowing

The good news is that you will be able to borrow more money at the best possible rate this year. The bad news is that interest rates are not expected to decline and, while home values might not continue to race upward at a sizzling pace, don't plan on them moving backward.

Some home loan borrowers had been eyeing 2006 so they could take advantage of the new conventional loan ceilings adopted by the two key players in the secondary mortgage market.

Most of the time, especially with home prices rising in many areas, the equity you accrue in appreciation far outdistances the difference you receive if mortgage interest rates go down. The truth is that home loan rates are lower now than a year ago, regardless of how many times you've been told "rates are on the rise."

On Jan. 1, Freddie Mac and Fannie Mae, the two biggest players in the secondary mortgage market, expanded their loan limit for single-family mortgages to $417,000 from $359,650, including reverse mortgages made under the Fannie Mae Home Keeper program. The move enables potential homebuyers and refinancers to borrow more money at lower interest rates. Amounts greater than $417,000 are classified as "jumbo" loans that typically carry a slightly higher interest rate.

Conforming loan limits usually adjust annually and are based on the October-to-October changes in the average home price as published by the Federal Housing Finance Board. The board's figures come from its monthly survey of lenders. Both new and existing homes are included in the survey.

The new loan limits mean more people will be eligible for conforming loans. As a result of the new limits, Fannie Mae estimates that as many as an additional 466,326 homeowners would be eligible for conforming loans. Fannie Mae's average loan amount was about $172,000 in 2005.

Also effective Jan 1:

* $533,850 for mortgages on two-family properties or duplexes, up from $460,400.

* $645,300 for mortgages on three-family properties or triplexes, up from $556,500.

* $801,950 for mortgages on four-family properties or fourplexes, up from $691,600.

The limit in designated high-cost areas - Alaska, Guam, Hawaii and the U.S. Virgin Islands - will be 50 percent higher for first mortgages.

The Federal Housing Administration also increased its loan limits for 2006. FHA, part of the U.S. Department of Housing and Urban Development, lifted its ceilings to $362,790 from $312,896 in about 30 urban areas.

These increases in the loan limits for home equity conversion and Home Keeper mortgages will enable seniors to access greater amounts of equity in their homes, providing a powerful tool for addressing their financial needs through retirement, said Peter Bell, president of the National Reverse Mortgage Lenders Association.

Approximately 80 percent of the 3,226 counties (2,575) in the U.S. are at the lowest FHA loan limit ($172,632). Only 104 counties, or 3.2 percent of the total, are at the current maximum loan limit ($312,896). The rest of the counties are somewhere in between.

There is no guarantee that counties at the current ceiling, or in between the floor and ceiling, will rise immediately.

The lending limits are available online at https://entp.hud.gov/idapp/ html/hicostlook.cfm.

Interest rates are expected to be moderately higher this year compared with 2005. Doug Duncan, chief economist for the Mortgage Bankers Association, estimated that mortgage rates on 30-year fixed-rate loans will rise to about 6.6 percent later this year after hovering near 6.25 at the end of 2005.

David Lereah, the National Association of Realtors' chief economist, said strong demand should keep home sales high even though the uptick in mortgage rates will cause some slowing.

According to the association, the national median existing home price, up an estimated 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent to $221,400 this year.

The median new-home price, up about 5.5 percent to $233,100 in 2005, is expected to jump 7.3 percent this year to $250,100.

Homebuilders Rally on Positive Reports

Shares of big homebuilders jumped on Monday after a batch of positive analyst reports painted an optimistic outlook for the housing sector in 2006, reassuring investors that the nation's homebuilders may have more room to rally after nearly five years of frenzied growth.

Homebuilders like Lennar Corp., KB Home, Pulte Homes Inc. and Toll Brothers Inc. all rose more than 4 percent on the New York Stock Exchange in afternoon trading. The Philadelphia Housing Sector Index, an index of 21 construction industry stocks, advanced 3.5 percent, led by manufactured homebuilder Champion Enterprises Inc., which climbed 8.4 percent.

"Long-term housing demand remains strong, (with) housing starts over the next decade to be in a range of 1.8 to 2 million per year," Merrill Lynch analyst Lorraine Maikis wrote in a report dated Jan. 9.

Housing starts, which refer to the beginning of construction of a unit of housing, are the bellwether indicator of the housing industry. The brokerage also projected large homebuilders' current backlog of homes for sale, land holdings, and access to capital "should translate into an above-industry unit growth rate in 2006."

Merrill's bright forecast for the industry coincided with bullish reports issued by other investment banks on Monday.

"We believe 2006 will shape up to be another strong year for the builders, as we look for new orders to increase by 16 percent on average on the back of continued industry consolidation, increasing market share gains and a benign interest rate and economic landscape," Deutsche Bank analyst Gregg Schoenleber wrote in a client note.

Although Deutsche Bank forecast housing starts will remain flat over the next year, "our outlook suggests the builders will grow sales and earnings at a more modest pace, 20 percent and 16 percent, respectively," compared to earnings growth of 42 percent in 2005, driven by strong backlog and order growth.

The positive research reports come as mortgage rates have been rising and home sales and price appreciation have been slowing in recent months, leading a growing camp on Wall Street to predict the nation's housing market has entered a downturn.

Recent economic indicators measuring housing starts, new and existing home sales and other data have generally pointed to a slowdown in the sector.

A growing number of homebuilders have also cautioned they are seeing a return to historical trends after posting several years of double-digit earnings and sales growth. Last Thursday, Colorado's top homebuilder MDC Holdings Inc. reported lower home orders in the fourth quarter, citing shortfalls in Virginia, Colorado and Arizona.

However, even MDC's fourth-quarter slowdown did not deter Citigroup housing analyst Stephen Kim, who predicted homebuilder stocks will rally on stronger-than-expected spring order data. "MDC's disappointing fourth-quarter orders do not portend a wider housing downturn, as many skeptics fear," Kim wrote in a note dated Jan. 8, adding that MDC's shortfall was specific to the company, not the overall industry.

"Although homebuilding stocks may continue to tread water during the rest of winter, we continue to believe the group is positioned to rally" with the advent of the spring selling season, which starts in early February, Kim wrote. "We believe the entire group will participate in the rally later this year."

Housing Solid in Face of Softening

The housing market, softening somewhat – as expected – from its recent record-setting pace, remains positive as a result of continued favorable market fundamentals, according to the latest economic indicators. Among the key statistics released by government agencies, research firms and industry-related trade associations in recent weeks were the following:

Housing Starts
Strong demand for new single-family homes helped buoy builder confidence as the housing market headed into late spring, noted the National Association of Home Builders. Citing its latest in a monthly series of builder surveys, Washington, DC-based NAHB said builders “continue to express confidence in the overall housing market and expect sales to remain strong during the next six months.” Housing posted healthy gains in April after a temporary decline in March. NAHB is holding to its most recent 2005 forecast of 1.92 million housing starts, down only 1.4% from the total posted in 2004.

Existing-Home Sales
Economic improvements and a growing population continue to support the market for existing-home sales, said the National Association of Realtors. It also reported existing-home sales rose to near-record levels in March, with a continuation of strong home price gains. Existing-home sales increased 1% in March, to a seasonally adjusted annual rate of 6.89 million units, the third-highest level on record, and 4.9% above the 6.57 million-unit pace posted in March 2004, Washington, DC-based NAR said, noting the record was a sales rate of 7.02 million in June 2004, followed by 6.98 million in November 2004. “With mortgage interest rates remaining historically low, gains in the labor market and economic growth appear to have lifted home buyers’ confidence,” said NAR chief economist David Lereah (see related graph, above).

New-Home Sales
Despite an uptick in mortgage rates, “there’s still plenty of demand” in the housing market, the National Association of Home Builders said last month, after sales of new single-family homes rose by an unexpectedly strong 12.2%, to hit an all-time-high, seasonally adjusted annual rate of 1.43 million units in March. “The strength of this market continues to surprise most experts, and March’s big acceleration in new-home sales was both unexpected and unaccounted for by our own builder surveys and other market signals,” said David Seiders, chief economist for NAHB. “Given the pace of sales to date and the slimmer inventories of unsold homes, the production side... remains exceptionally healthy. [But], we are keeping a close eye on investor activity in some extremely hot markets.” Seiders warned, however, that it’ll be difficult to sustain the robust sales pace, even though 2005 new-home sales should challenge last year’s record 1.2 million units.

Appliance Shipments
Domestic shipments of major home appliances declined for the fourth straight month in April, compared to 2004, and were running more than 9% behind last year’s record pace, the Association of Home Appliance Manufacturers reported. April appliance shipments totaled 6.17 million units, compared to the 6.46 million units shipped in April 2004, said Washington, DC-based AHAM. Shipments for the first four months of 2005 totaled 24.5 million units, down 8.8% from the first four months of ’04, AHAM noted, adding that much of the decline is due to shipments of home comfort products, which were down 33% for the year.

Cabinet & Vanity Sales
Sales of kitchen cabinets and bathroom vanities rose 16.1% in March over sales the same month a year earlier, said the Kitchen Cabinet Manufacturers Association. Reston, VA-based KCMA also said manufacturers participating in the association’s monthly “Trend of Business” survey reported sales of stock cabinets were up 14.4% for the month, while semi-custom cabinet sales increased 18.6% and custom cabinet sales gained 14.9%. Year-to-date cabinet sales for the first three months of 2005 were up 14% over the same period a year ago, KCMA added.
MARKET ANALYSIS
Housing Market Seen Being Bolstered by New Wave of Immigrants, NAR Reports

Washington, DC — The record-breaking housing boom of the past several years – resilient even the face of an economic downturn – will likely be sustained in the future by a wave of foreign-born people emigrating to the U.S.

That’s the view of the National Association of Realtors, which said last month that immigrants are expected to be “a booming segment of future housing demand,” offsetting anticipated interest-rate gains and the inevitable softening of demand resulting from the aging of the Baby Boom generation.

“Immigration has been a significant factor in the changing demographic structure of the country,” said NAR economist Keunwon Chung, noting that the average time lag from an immigrant household’s arrival until its first-time home purchase is nine to 13 years.

Chung pointed to the fact that more than one out of 10 people currently in the U.S. population are foreign-born, while minority households will account for 28% of all U.S. households in 2005. That figure is expected to grow to 32% by 2015.

More than 10 million immigrants have arrived in the U.S. since 1990, and they will be an important driver of housing demand in the future, particularly in major metropolitan areas such as New York, Los Angeles, San Francisco, Chicago and the District of Columbia, the analyst said, adding that foreign-born households account for roughly 10% of new- and existing-home sales.

“While (they) may not instantaneously add to housing demand, the majority eventually become homeowners... and [they] will play an even more vital role in the future housing market,” Chung concluded.

U.S. November Pending Sales of Existing Homes Falls 2.5%

Contracts to buy previously owned U.S. homes fell in November, a third straight decline that adds to evidence the U.S. housing market is slowing heading into 2006.

The index of signed purchase agreements, or pending home resales, fell 2.5 percent to 120.6, the National Association of Realtors said today in Washington. That follows a revised reading of 123.7 in October and a record 129.2 in August.

Rising home prices and 30-year mortgage rates that climbed from a month earlier may have put homes out of reach of some buyers in November. Home affordability dropped to a 14-year low in the third quarter, and economists expect house sales to decline this year after setting a record in 2005.

``The extended boom in home sales appears to have run its course,'' in 2006, said Robert Mellman, an economist at JPMorgan Chase Bank in New York, before the report. ``The housing market frenzy that enticed potential homebuyers to rush into purchases before prices moved still higher has now apparently broken.''

Pending homes sales were forecast to fall 1 percent, the median prediction in a Bloomberg News survey of seven economists, from an originally reported 123.8. Estimates ranged from a decline of 0.5 percent to 1.5 percent. The index averaged 125.3 in the first 10 months of last year, compared with 120 in the same period of 2004. Its base value of 100 represents the 2001 average.

The November pending resales index fell in three of the four regions compared with the prior month. Resales declined 8.3 percent in the Northeast, 5.1 percent in the West and 1.9 percent in the South. Contract signings rose 3.4 percent in the Midwest.

Mortgage Rates

Borrowing costs have risen as the Federal Reserve has increased its benchmark interest rate to contain inflation. The Fed on Dec. 13 raised its overnight lending rate to 4.25 percent, the 13th straight increase. Thirty-year mortgage rates rose to an average of 6.33 percent in November from 6.07 percent a month earlier and 5.73 percent in November 2004.

At November's average, monthly costs on a $100,000 loan would be $620.93. When mortgage rates were at a four-decade low of 5.21 percent in June 2003, the cost was $549.73 a month.

Rising rates and higher home prices caused the Realtors' affordability index to drop to 117.8 in the third quarter, the lowest since the third quarter of 1991. Figures greater than 100 suggest households have the income needed to purchase a property at the median home price.

Faltering Sales

Sales of new and previously owned homes, which the Realtors predicted would set a record in 2005, showed signs of faltering late in the year. Sales of existing homes fell to an eight-month low in November, leaving the number of houses on the market at the highest level since 1986, while November new home sales fell by the most in 11 years, separate reports last month showed.

The pending home sales index tracks contract signings for previously owned homes. Closings are tracked by the existing home sales index and reflect deals begun a month or two earlier.

Resales account for about 85 percent of total sales, with new home sales accounting for the rest.

Home construction, which contributed 0.43 percentage point to economic growth of 4.1 percent in the third quarter, may add less to growth in coming months, economists said.

The National Association of Home Builders/Wells Fargo's index of builder confidence in December dropped to the lowest since April 2003, the Washington-based association said last month.

``The latest economic reports confirm the early stages of a decline in home sales, and an associated slide in residential construction activity, is just a matter of time,'' said Mellman.

The Realtors' association forecasts annual sales of new and existing homes will fall 3.8 percent to 8.068 million in 2006 from a year earlier. It predicts the 30-year fixed mortgage rate will rise to an average of 6.3 percent in the first quarter of this year and to 6.6 percent in the fourth quarter.

The pending resales index, which includes condominiums and co-ops as well as single-family houses, was started by the Realtors in March.

Home builders see flat housing starts

California's 12-year run of home building gains will likely end in 2006, as developers pause to clear out excess inventory during the early part of the year, according to a trade group's annual housing forecast.

The Sacramento-based California Building Industry Association report released Wednesday also predicted the state's torrid pace of housing price advances will slow, to between 5 percent and 8 percent per square foot. That's well off the 25 percent to 30 percent increases of the past few years.

The first quarter in particular could promise some price relief, as home builders pony up concessions to slice their growing inventory levels, said Alan Nevin, CBIA chief economist.

The CBIA predicts that Bay Area housing starts in 2006, as measured by the number of new housing permits, will be flat with last year, at between 26,000 and 28,000 units. The cost of low-priced houses in the region could rise another 5 to 8 percent, mirroring the statewide trend, but Nevin said higher-cost housing will likely trail those gains.

Statewide, the CBIA projects 185,000 to 205,000 new housing permits in 2006, down from an estimated 212,000 last year. Most of the decline will likely be in the high-end segment in coastal areas. Transactions in the resale market will likely fall to between 550,000 and 600,000, down from a recent high of 650,000.

Given the decline in housing construction, the CBIA also expects to see a "modest pull-back" in construction employment, which accounted for 13 percent of the more than 400,000 new California jobs created in 2005.

California housing starts have been declining since October, as home builders move to cut inventory levels in the face of an 8-month-long fall in sales.

The building decline is likely to persist through the first quarter, "but spring will bloom again," Nevin said. "We'll see the construction industry and new housing move forward at the pace it has been the last couple of years."

Others are not as optimistic.

Christopher Thornberg, senior economist with the UCLA Forecast, expects housing construction to drop by 25 percent next year, resulting in significant job loss for the construction industry.

He said the CBIA's pricing prediction could prove true, but he hopes it doesn't because he believes prices are already "out of whack with reality."

"The real question is, is it a good thing if they go up and the answer is clearly 'no,'" he said. "It will just make things that much worse and it will take that much longer to correct."

Mortgage lending adapts to changing rate scene

When Nancy Petty took prospective home buyers around for home tours this summer, the Bel Air, Md.-based Realtor found that her clients would have to move quickly to bid for homes, sometimes without really taking a thorough look at the properties.

Often, even when Petty's buyers were first with an offer, they lost out to a higher bid.

Now, with interest rates on the rise, those days of bidding wars and escalating prices are a thing of the past. Sellers may also find they need to throw in a couple of extras like paying for the replacement of wallpaper or carpet that's not to a buyer's liking.

"We're not encouraging the seller to overprice the house. A couple of months ago, we listed it at whatever the seller wanted," said Petty, who is with Prudential Carruthers Realtors.

These changes in selling tactics hint at shifts in the way business is done by not only by Realtors, but by mortgage bankers who saw record demand for their services in recent years.

Next year, higher borrowing costs will slow home sales and mortgage lending, thinning the ranks of lenders. Some will either cut staff or merge to stay competitive, while others may be stuck with defaults by borrowers who took on too much debt.

Much of the drop in home sales and lending expected next year comes amid 13 interest rate hikes engineered by the Federal Reserve in the last year and a half.

Rates for 30-year mortgages — the most common home loan — today are at around 6.30 percent, up from 5.68 percent a year ago. Next year, these rates are expected to be at around 6.65 percent.

Although the rise in rates will damp lending activity, some banks may get calls from borrowers looking to get out of mortgages with rising monthly loan payments.

"There are a lot of exotic mortgage types in the market right now. As the market slowed down, lenders attempted to keep the game going by offering more and more alternative mortgage types that have the appearance of lowering the costs of a monthly loan payments," said Dick Bove, banking analyst with Punk Ziegel & Co.

The recent housing boom saw a massive jump in demand for a wide variety of adjustable rate mortgages that initially offered lower monthly borrowing costs and allowed borrowers to qualify for larger loans.

If the rise in monthly loan payments is gradual the payment shock is not as great for a consumer, but some new loan products have such low initial monthly payments that the rise in borrowing costs is dramatic. There are concerns that some consumers, especially those who are less credit worthy, will not be able to manage the increase in borrowing costs. Among these exotic mortgages, option ARMs were "the worst of the breed," said Bove who described them as "nuclear waste."

Among the different option ARMs, the mortgage that has caused most concern is one that allows borrowers to pay so little that he or she does not even cover monthly interest costs, according to Keith Gumbinger of HSH Associates, which tracks the mortgage banking industry.

"In a sense, you are deferring the day of reckoning," he said.

By not paying the full amount of interest the money owed to a lender grows — a situation known among lenders as negative amortization — and the home buyer sinks deeper into debt.

Option ARMs as well as mortgages that allow borrowers to pay only interest and forgo building equity in a home were designed for a real estate market in which sales were brisk and borrowers could readily leapfrog from house to house.

Now that rates are higher and sales have slowed, some borrowers may live in a house longer than expected and face higher borrowing costs. Consumers unable to refinance out of that loan could then be late on a couple of payments or, worse, default.

Analysts believe that the health of the overall economy — especially the employment picture — will be sound enough so there won't be a large wave of defaults.

But any notable jump in soured mortgages could be big problem for banks that retain adjustable rate mortgages in their own portfolios.

"By summer, we'll see significant problems in the sector. We'll see some well publicized blowups occur," Bove predicted, adding "we have got a serious problem here."