Busy Months Ahead in Housing Market

The following article, written by Lawrence Yun, appeared in the February issue of Realtor Magazine.

The shift to a slower but still very strong market for home sales has been a challenge, but the signs are multiplying that the worst could well be behind us.

New-home sales and pending existing-home sales both based on contracts rather than closings and thus forward-looking indicators have been trending up modestly in recent months and are now appreciatively higher than they were at their low points in July 2006. The rate of new-home sales at the end of October 2006 was slightly more than 1 million, up from 979,000 in July. The pending home sales index was at 107.5, up from 105.6, during the same period. As of November 2006, the index remained relatively the same at 107.

Assuming falling interest rates and rising mortgage purchase applications in the final two months of 2006, the upward trend in sales will most likely continue. What's more, the number of homes on the market appears to have peaked. Inventories are trending lower, a marked change from the increases in listings we saw in the first half of 2006.

One area of continuing weakness is new-home construction. Housing starts and permits for single family homes have fallen by more than 35 percent from a year ago. Starts were at 1.18 million in October 2006, down from 1.73 million a year earlier.

But that drop should be viewed as positive news. It'll thin the inventory pipeline. The supply could well drop from more than seven months at the end of 2006 to six months by the end of the first quarter of 2007. A drop in the nationwide inventory to that level would signal a return to sustainable, historically more balanced conditions. Look for existing-home sales to grow 5 percent during 2007 to a level of 6.49 million.

Home prices, which have been falling since August, will follow a positive trend line, too, and begin to strengthen by the second quarter. National average price appreciation could reach $228,700 in the second quarter of 2007, up from $226,700 in the second quarter of 2006.

So we can all feel good that 2006, one of the highest years for sales volume on record, is poised to be replaced by an even better 2007. Housing has weathered the transition back to a sustainable market after the boom years.