4% drop in home sales, slower appreciation predicted for 2006

But Realtors' top economist foresees `soft landing' as mortgage rates approach 7%


SAN FRANCISCO -- A combination of higher interest rates and years of rising prices could soon take some air out of the hot U.S. housing market.

"The boom is showing some signs of tiring," said David Lereah, chief economist with the National Association of Realtors. "We are looking at about a 4 percent drop in home sales next year. We are projecting a significant drop in the price appreciation pace."

But even though the velocity of the housing market will subside, "we are looking for a soft landing," he told the Realtors' national convention in San Francisco yesterday.

Economic forecasts have been mixed in recent months, but Lereah is the latest high-profile housing-sector economist to forecast a decline in housing.

David Seiders, chief economist of the National Association of Home Builders, said recently that the housing market is "topping out."

The Realtors association is forecasting that home appreciation would slow from a nationwide average of more than 12 percent this year to about 5 percent in 2006. In hot markets, the falloff could be more pronounced, Lereah said.

"Some markets are more susceptible to interest-rate risks and shock," he said. "I cannot guarantee that there will be no hard landings."

Cities including Las Vegas; Orlando, Fla.; Phoenix and Washington, D.C., are on the Realtors' list of areas that have seen the biggest home price increases in the past three years. Markets such as Dallas; Detroit; Austin, Texas; Houston and Denver have remained cool.

"The country is really unbalanced when it comes to the price of a home," Lereah said. "The boom has really discriminated across America."

Many cities are already moving from a seller's market to a buyer's market. And the time it takes to sell a house is increasing in many cities.

"Eventually that seller will have to revise his expectations downward," Lereah said. "Instead of getting 20 percent appreciation in their home they will have to get 5 percent."

Even with the forecast decline in sales next year, housing activity remains at a very high level. And Lereah said the market is fundamentally sound.

"In the real estate market, there is not hard evidence we have bubbles waiting to burst," he said.

But higher interest rates alone would cause a softening in home sales, economists agree.

"Mortgage rates are going up, but they will still be below 7 percent," Lereah predicted.

While still low by historic standards, he said that mortgage rates approaching 7 percent "could be more troublesome" for some areas of the country.

The increased use of adjustable-rate mortgages and so-called "exotic" home loans has made some borrowers more vulnerable to higher interest rates. Adjustable-rate loans make up about 30 percent of the mortgage market, Lereah said.

Lereah said among the real threats to the continued health of the housing market are proposals in Washington to cut tax deductions for home mortgage interest and property taxes.

"In my opinion it's terrible timing - it's almost irresponsible," he said. "That would do severe damage to a lot of the local markets across the nation. We are looking at probably a 10 to 15 percent drop in home prices" if the proposals become reality.

Steve Brown writes for The Dallas Morning News

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