Housing troubles expected

Investor pullout will lead to dip in sales in '06, economists say

09:27 AM CST on Thursday, January 12, 2006

By STEVE BROWN / The Dallas Morning News

ORLANDO, Fla. – An investor pullout from the housing sector this year could spell trouble for many U.S. markets.

High-priced home markets and condominiums will be the hardest-hit by an anticipated slowdown in investment activity, the country's top housing analysts said Wednesday.

"We expect housing activity to drop about 8 percent this year – it's primarily because of the investors' slowing purchases," said David Berson, chief economist with mortgage company Fannie Mae.

Mr. Berson and other housing economists were in Orlando this week for the National Association of Home Builders' annual conference and exposition.

All the economists are predicting a dip in home sales in 2006, caused mostly by a decline in investment activity.

"We can't find a period when the investor share of home sales has been higher than in the last year," Mr. Berson said. "In the fourth quarter, it looked like investors were starting to step back."

That's bad news for such cities as Las Vegas, Phoenix, Orlando, Miami and San Diego, where investors account for more than 25 percent of the home purchases.

Nationwide, investor and second-home purchases total at least 20 percent of the market.

Investors also account for a big chunk of condominium sales in cities nationwide, including the Dallas area.

"I've been suggesting that we be careful not to oversupply the condominium market," said National Association of Home Builders' chief economist Dave Seiders.

"Once the investor activity declines, we may be looking at some pretty soft conditions there."

In both the condo and single-family home sectors, the fear is that investors will choose to sell properties or decide not to go through with purchases they've signed up for, the analysts say.

That could lead to oversupply and dropping prices.

"That's the big downside risk to the housing market this year," Mr. Seiders said. "The question is how many units in that hidden inventory will actually come on the market."

The National Association of Home Builders is betting that home starts will drop by around 6 percent this year.

Mortgage rates are expected to rise to an average of 6.6 percent.

And economists are predicting much slower growth in nationwide home price gains in 2006.

"I can't see how we can maintain double-digit house price growth nationwide like we have enjoyed," said Frank Nothaft, chief economist with mortgage giant Freddie Mac.

The drop in investment will take some hot air out of values.

"Investment activity introduced more speculative fervor in valuation of homes and could have pushed home values higher than can be supported," Mr. Nothaft said.

Impact of the investment slowdown will depend on the percentage of such buyers in each market, Mr. Berson said.

"It appears the condo market is slowing considerably," he said. "It's no surprise because that's the type of housing investors most favor – there is no lawn to mow and you don't have to shovel the snow.

"The condo market will almost certainly perform worse than the single-family market," he said. "The single-family market may not move down by much at all."

Dallas housing analyst Mike Puls said he sees speculative buyers leave the local condo market.

"The investors are gone – they are back in the stock market," Mr. Puls said. "That's 30 to 50 percent of the deals."

Investors are leaving the housing market for a variety of reasons, the analysts said.

"Investor demand for housing is more volatile," Mr. Berson said. "Is it the stock market instead, maybe? Maybe it's gold. Maybe it's oil."

Speculative buyers may also cash out of overheated markets in favor of lower-price cities.

"I've heard about some of the investor activity making its way to Texas," Mr. Seiders said. "Price performance in Texas has been relatively slow, and there is some expectation it will accelerate. I don't think that's a good bet to make."

Economists see Texas cities as among the most stable housing markets.

"Texas is one of the better markets in the country," Mr. Berson said. "While many markets are cooling, Texas is picking up."

Existing home sales slip in November

09:10 AM CST on Thursday, December 29, 2005
Bloomberg News

U.S. sales of previously owned homes declined last month to the lowest level since March, adding to evidence the housing market is cooling.

Home sales dropped 1.7 percent to a 6.97 million annual rate from October's 7.09 million pace, the National Association of Realtors said today in Washington. The number of homes for sale increased to the highest level since April 1986.

A rise in mortgage rates this year and higher home prices that have made housing less affordable will slow sales and deprive the economy of a source of strength in 2006, economists said. Home purchases are forecast to wane next year after a five- year boom.

“Demand appears to be cresting,” Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto, said before the report. “The market is definitely cooling, but we haven't yet reached the point where we're going to have single-digit price appreciation.”

The median price rose 13.2 percent from a year ago to $215,000, the Realtors group reported.

Economists expected sales to fall to a 7 million annual rate, according to the median forecast in a Bloomberg News survey. Estimates ranged from 6.75 million to 7.2 million. November's level is the lowest since 6.87 million in March.