Wimpey (George) - The UKs Leading Housebuilder

Experts Expect Slower Price Appreciation in '06 [US]
1 January 2006
Home Equity Wire

Home price appreciation nationally continued at an unexpectedly strong, double-digit clip in 2005, but some industry observers expect the market to cool considerably this year.

Among them are David Seiders, chief economist of the National Association of Home Builders, and James Glassman, senior economist at J.P. Morgan Chase. Both anticipate that the heated housing market will slow down this year, even as the broader economy remains strong and perhaps gains some strength.

Mr. Seiders said during a recent conference call that he expects home price appreciation to slow to about half of 2005's pace this year, with prices nationally gaining about 6.5%. He uses the Office of Federal Housing Enterprise Oversight's home purchase price data as a benchmark for his analysis.

He said recent housing-related data have given a "confusing set of monthly and even weekly indicators" about what direction the housing market is heading in and what its current condition is. Despite the sometimes-contradictory indicators, he said that nationally, the housing market probably peaked in the third quarter and has now embarked on a "long-expected cooling process." Though some recent numbers - such as strong home sales - suggest the peak may not yet have been reached.

"My own judgment still is that the market, which has been extraordinarily strong and hot, is toying around with peaks if not slightly past them," he said. "I think that the demand side probably is tapering off to some degree."

Higher interest rates have played a big role in slowing down home sales activity, some builders report. Mr. Seiders said homebuilders have reported evidence that demand may be cooling and are facing more price resistance. As a result, some builders are offering more incentives to facilitate sales.

All that points toward some possible weakening in home sales this year, Mr. Seiders said.

He expects interest rates to continue edging up through 2006, with the 30-year mortgage rate approaching 6.75% by late this year. A similar trend is likely to prevail in the 10-year Treasury rates.

Mr. Glassman said that anecdotally, evidence is accumulating that the home sales environment is becoming more of a buyers market.

In some ways, the rapid appreciation of home prices in recent years indicates that real estate is catching up with the rest of the economy. Mr. Glassman said real estate lagged behind the pace of economic expansion in other sectors during the economic boom times of the mid-1990s.

But he said that, especially in high-cost markets, prices may have outpaced reason. He expects home price appreciation to slow down quite a bit this year, especially in hot markets.

"When the prices get to levels that are unaffordable, it sort of sets in motion its own correction," Mr. Glassman said.

But overall, Mr. Glassman is "fairly sanguine" about the near-term prospects for housing, because the broader economy is in good shape. He said 2006 might present a "transition to more balanced growth" for the market.

One sector of the housing industry that may experience something of a boom this year is the manufactured housing sector, which has been challenged for some time, according to Mr. Seiders.

"I am expecting that market to pick up a good deal of steam as we go through the next two years, primarily related to the hurricanes," he said.

At a Glance: NAHB Projections of Home Price Gains

2005
10.7%

2006
6.5%

2007
4.4%

Source: National Association of Home Builders