Economists: U.S. Housing Market Slower but Strong

The U.S. housing market will remain strong but begin to slow in 2006 after five record-breaking years, banking and housing economists said on Thursday.

But many economists raised concerns about the level of investor activity in the market, and said the housing market could slow more significantly if investors pull out in greater numbers than now anticipated.

"Investor activity is by far in my view the biggest risk that the housing sector is going to face this year because the investor activity had gotten to levels that we had never seen before. We're basically in new territory there," said David Lereah, chief economist for the National Association of Realtors.

"There is a risk that investor shares could really come down significantly in some of our very hot markets," Lereah said on a conference call organized by the Homeownership Alliance, a group of trade and professional associations.

The loss of investors would be compounded if those buyers not only stopped buying but put their properties back on the market, said David Seiders, chief economist with the National Association of Home Builders.

"That could create a much deeper problem than we're talking about," he said.

The housing market has rallied for five years, shattering construction and sales records and sending prices up more than 53 percent nationwide over that period.

Some of the hottest markets have seen even greater price appreciation, such as California, where home prices soared nearly 110 percent in five years, according to government data. Such price gains have been called unsustainable by economists and market analysts.

But as mortgage rates began to rise in September, the housing market started to slow. Anecdotal evidence of a cooling in some of the priciest markets over the summer has since been followed by data pointing to a slowdown.

Earlier Thursday, for example, the Realtors group said pending sales of U.S. homes fell in November to the lowest level in 10 months. The Mortgage Bankers Association earlier this week said mortgage applications fell for a fourth straight week and a separate report last week showed home resales dropped in November.

For 2006, economists said the housing market would slow but still hold strong by historical standards. The economists' forecasts for home sales and price appreciation varied, but most said they held an optimistic view.

Fannie Mae (FNM) Chief Economist David Berson said his view was more pessimistic than others' forecasts. He said he expects an 8 percent decline in home sales in 2006 and price appreciation of just 3 percent compared with double-digit price growth in recent years.

"But that would still mean home sales in 2006 would be third strongest ever," Berson said. "So while it would be a down year for housing, it's not a down year. It's still a very strong year for housing."