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2006 Real Estate Trends: National

   By: James Christensen

The National Market
The latest report on third-quarter home prices, released in November by the National Association of Realtors, showed continued strength. But increasingly there are signs that prices have reached a plateau.

Of 147 markets tracked, 69 had gains from a year ago of more than 10 percent -- only six metro areas experienced declines.

But from the second quarter to the third quarter, the national median home price rose to $215,900, up just 3.8 percent. That contrasts with a 10.4 percent jump in the prior quarter.

And more and more leading indicators are pointing to a slowdown.

In Boston, real-estate investor Matthew Martinez reports recently having spoken to five condo converters. "They all said the party was over," Martinez said.

In Florida, Elena Filipa, vice president of the Corcoron Group in West Palm, said "We've leveled off. I would say prices will go up this year, but not as fast as they have."

None of this surprises the many economists who have been waiting for a downturn.

Richard DeKaser, chief economist for mortgage banker National City, has been reluctant to call the top, but thinks it has finally passed.
"We're coming down the other side of the mountain," said DeKaser.
The signs include:

Builder pessimism The builders DeKaser surveys are less optimistic than they were even a few months ago. Separately, one leading builder, Pennsylvania-based Toll Brothers, announced last week that expected demand for 2006 would be down, resulting in moderating price increases and fewer sales.

New-home sales declining DeKaser also notes that the number of new homes sold have fallen sharply since peaking in July at an annual rate of 1.3 million units.

DeKaser calls new-home sales (rather than existing-home sales) the canary in the coal mine. "Developers tend to be more sensitive to market conditions," he said. They have cash flow issues, payrolls, and loans that put more pressure on them to sell.

Ordinary home sellers are often more selective than developers, even taking properties off the market if they don't get the price they want. Developers have to drop prices to move inventory.

Inventories rising Supplies of new homes are way up, to nearly 500,000 units, from 350,000 a few months ago. "That's an all-time high for new homes," says DeKaser. The higher the inventory, the more likely prices will fall.

Sell times are up Houses are sitting on the market longer. New homes now take about 4.1 months to sell and existing homes 4.7; both figures are up substantially.

What to expect

In a recent survey, NAR members say they predict home prices to rise only 5 percent in the next 12 months. Nearly half of the realtors predict prices will rise less than five percent and 6.4 percent actually expect prices to fall.

"You can't expect double-digit price increases to go on forever," said Walter Molony, spokesman for NAR. "We're seeing a market in transition in which there'll be an easing of price increases in the future."

While DeKaser expects a slowdown, he predicts an "orderly transition" for the most part, with some exceptions. "There will be busts in some markets," he said. "Mostly, we'll come out of it unscathed."

For the most part, DeKaser doesn't envision losses on that scale. He thinks home prices will decline 1.7 percent during the fourth quarter of 2005 and stay almost flat all the way through 2007.

But history shows that some over-valued markets could fare much worse.
Molony points out that the most severe drops in real-estate prices are usually triggered by an underlying economic crisis. After oil prices went into a six-year decline in the late 1970s, housing prices in oil cities experienced steep drops.

In Oklahoma City, prices plummeted 26 percent in real dollars from 1983 to 1988. With inflation, the "real" loss was more than 40 percent.

Houses in many oil patch cities are worth less in real dollars than they cost more than 20 years ago.

Written for By James Christensen Real Estate Expert and educator. Our training site offers a valuable service to individuals looking to get into the Real Estate industry.

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