Slowdown in housing sector will affect rest of U.S. economy

~ Analysts are forecasting that sales of existing and new homes will fall this year.

WASHINGTON -- The five-year housing boom is showing increased signs of cooling, and that's likely to mean slower growth for the entire national economy. The big question now is whether home prices will come crashing to earth with even more severe consequences.

The National Association of Realtors reported Wednesday that sales of existing homes climbed to an all-time high of 7.072 million units in 2005, up 4.2 percent from 2004 and the fifth straight year sales have set a record.

However, in a sign of slowing activity, sales fell by 5.7 percent in December, marking the third straight monthly decline, something that had not occurred since early 2002.

"The bloom is definitely off the housing rose. Housing peaked last summer and has been weakening ever since," said Mark Zandi, chief economist at Moody's Economy.com.

Analysts are forecasting that sales of both existing and new homes will fall this year, perhaps by as much as 10 percent, reflecting the adverse impact of rising mortgage rates and buyer resistance to current price levels.

The Realtors group reported that the median price for an existing home sold in 2005 rose to $208,700, up 12.7 percent from 2004. That was the biggest annual increase since a 14.4 percent rise in 1979.

Slowing price increases

But David Lereah, chief economist for the Realtors, said the days of double-digit price gains were probably coming to an end. He predicted price increases would slow to more normal gains of around 5 percent to 6 percent this year. Some analysts cautioned that the hottest markets in places like Florida and California could see actual price declines.

The boom in housing has boosted overall economic activity over the past five years. Zandi said he believed that about 1 percentage point of last year's estimated economic growth of 3.5 percent occurred because of the effects of the strong housing market.

Housing increased employment in construction industries and boosted consumer spending, which accounts for two-thirds of total economic activity, as rising home values allowed millions of Americans to refinance their homes or take out home equity loans to support higher spending on consumer goods.

Analysts said the economy could be in trouble this year unless other forces take up the slack from a slowdown in housing.

Analysts at Goldman Sachs estimated that the housing slowdown will begin to be a drag on economic growth by midyear and by early 2007 will be trimming growth by around 1.5 percentage points. Other sectors, such as business investment spending and an improving trade performance, are expected to take up the slack.

"We think that housing will go from being a source of strength for the economy over the past several years to a drag on the economy over the next couple of years," said Andrew Tilton, a senior economist at Goldman Sachs.

The danger is if home sales fall off by bigger amounts than analysts are currently forecasting.

That could cause investors, who have boosted sales with their purchases of rental properties and vacation homes, to start dumping homes onto the market, further depressing prices.

However, analysts do not believe that is the most likely outcome. They expect sales to decline slightly, reflecting only moderate further increases in mortgage rates as the Federal Reserve wraps up its credit tightening campaign.

Analysts believe the Fed is nearing the end of its rate hikes, with possibly two more quarter-point moves at its meetings next Tuesday and on March 28. If the Fed does call a halt to the rate increases, analysts said 30-year mortgage rates, currently at 6.1 percent, will only rise to perhaps 6.5 percent or 6.75 percent by the end of this year, levels that should still support home sales.

Sales were down in December by 11.4 percent in the West, 7.2 percent in the South and 2.6 percent in the Midwest. The level of sales was unchanged in the Northeast.

Analysts said some of the weakness last month reflected unusually cold weather in parts of the country and unusually wet weather in California and other western states.

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On the Net:

Existing home sales: http://www.realtor.org