- The Washington Times - Tuesday, March 1, 2005

An unexpected 9.2 percent drop in new home sales in January and a 13 percent drop in the median home price provided the latest signs that the red-hot housing market may finally be cooling, economists said.

The fall-off in sales was among homes costing more than $200,000, with the biggest losses in the Northeast, Midwest and South. Sales of more affordable homes under $200,000 grew — resulting in a median price drop of $30,000, to just under $200,000, the Commerce Department reported yesterday.

“Housing fundamentals are as good as they get,” said Richard Berner, chief U.S. economist at Morgan Stanley. He predicts both sales and home price growth will decline this year and next.

The market may have sown the seeds for its own demise when prices soared well beyond average household incomes in many locations, particularly on the East and West coasts, he said. In the Washington area, the median home price of $371,000 is more than three times the average household income.

But historically low 30-year mortgage rates averaging below 6 percent continue to nurture the market, despite a softening of demand. Like most economists, Mr. Berner said he has been humbled by the market’s resilience in the face of repeated predictions of its demise. He does not expect the market to tank in any big way.

“A precipitous decline in activity is unlikely” as long as mortgage rates remain in the single digits and home buyers are earning higher incomes and getting new jobs, he said.

Home prices may have gotten ahead of incomes in some areas, but they “are likely to rust, not bust,” Mr. Berner said. Personal incomes rose 5 percent on average last year, according to a Commerce report yesterday, while home prices soared by 13 percent.

Mr. Berner said “crystal-ball gazers” like himself “have eaten a lot of ground glass trying to call a top in the housing market in the last two years. … Undaunted, I’m taking a stand.”

The housing market likely peaked last year and is slowly burning itself out, he said, primarily because the five-year boom has tapped into much of the demand for homes among a growing immigrant population and persons who are prime home-buying age.

Growth in both of those key groups is slowing after a frenetic decade during which the percentage of Americans who own homes shot up to a record 69. Immigration, in particular, has gone down significantly since the September 11 terrorist attacks, Mr. Berner said.

On top of that, the nearly 50 percent jump in home prices nationwide is making houses less affordable for first-time buyers. Home prices are up even more dramatically in the Washington area, where they have doubled since 1999.

With fewer willing buyers, new home sales fell from a record-high annual rate of 1.3 million in October to 1.1 million in January. Existing home sales also were flat and have fallen from record rates of more than 7 million last year, according to the National Association of Realtors.

Perhaps the most telltale sign of a slowdown is the rise in inventories of unsold homes from a less than four months’ supply a year ago to a 4.7 months’ supply in January. It suggests home builders have gotten a little ahead of slowing demand, Mr. Berner said.

Dave Wilson, president of the National Association of Homebuilders and a custom home builder from Ketchum, Idaho, cautioned against a “knee-jerk” reaction to the unexpectedly weak sales report, although he too predicts a cooling of the market this year.

“Weather was a major factor in the decline, with unusually harsh winter conditions contributing to a 40 percent drop in the Midwest alone,” he said. The association’s surveys of traffic in new housing developments indicate the market remains solid.

Most economists predicted a cooling of torrid home sales last year when the Federal Reserve began raising short-term interest rates. But the rates on long-term mortgages actually declined despite Fed increases totaling 1 percentage points.

Fed Chairman Alan Greenspan called the decline in long-term rates a “conundrum” in testimony last month and suggested it may be a short-lived phenomenon. Mr. Berner agrees, and said the reprieve on mortgage rates will end this year, with long-term rates rising a percentage point or more by the end of this year.

Jon Noonan, chief investment strategist at Appleton Partners, said low rates are only one of the underpinnings making the housing market strong. Another is the boost to home sales from a 1997 exemption from income taxes for capital gains on most home sales — a key development that unleashed the housing boom, he said.

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