Some Markets Could Be at Risk of Home Price Declines

The housing market shows no signs of slowing down, but if demand weakens in certain areas of the country such as the upper Midwest where there are fewer jobs, or if there is a recession, the market will likely see some price declines, according to the chief economists of the Homeownership Alliance here.

By early 2006, some of the overheated markets in California, Nevada, Arizona and Hawaii could see a slowdown in the double-digit price gains, said Frank E. Nothaft, chief economist, Freddie Mac, during a telephone conference in which economists gave their outlooks for the second half of 2005 and beyond.

"It's going to be very solid for the remainder of the year. There will be a reasonable cooling-off period but no crash in these markets," he said.

David Lereah, chief economist, National Association of Realtors, said the weaker economy has actually helped the housing market, keeping rates low. "Yes there is froth in the markets, but it's not a bad word," Mr. Lereah said. "Froth can be healthy. The media is carried away by the word," he said. "It's the effervescence rather than the popping of bubbles that is happening locally around the country."

Sixty-six metro areas have experienced price appreciation where demand is greater than the very lean supply of inventory of homes, but Mr. Lereah said he thinks the market is "very healthy, even though we do have very strong demand." Housing starts rose back over two million units in April after taking a tumble in March. Based on the pending home sales index, which is now released monthly, May and June home sales will be strong and set another record. The index, based on data collected for April, stands at 128.2, which is 3.6% higher than March and 9.2% above April 2004.

"The problem is supply, not demand in the double-digit price appreciation cities," he said. "Confidence is still way up and more mortgage applications are being filed."

Mr. Lereah expects that mortgage rates will reach 6.1% by the end of the year and move to 6.5% by 2006, still an historical low.

Activity seems to be keeping up right now with investment and vacation homebuying, adding to sales and home price gains, with 23% for investment and 13% for vacation, according to David Seiders, chief economist, National Association of Homebuilders. Locations for much of these are second-home purchases or investments in coastal and mountain areas of the country.

"Investor demand is more volatile. Investors can pull out of markets if they view the economic investment in some other state or country more appealing," he said.

Investors should not expect high levels of appreciation but returns that are more consistent with appreciation of 4%-5%, which is more common in the market, he said.

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