Existing Home Sales Decline

Dec. 29, 2005 — -- The National Association of Realtors said that sales of existing homes declined in the month of November.

The industry trade group said that sales of pre-owned homes sold at an annual rate of 6.97 million, slightly below the market expectations. That is a 1.7 percent decrease from October's figure of 7.09 million homes.

The median price for a home sold last month was $215,000, down $3,000 from the previous month, but up 13.2 percent from a year ago. The NAR cautions that home prices need to be compared to the same period from the previous year versus month-to-month comparisons that do not account for seasonal changes and buying patterns.

In the statement announcing the November sales numbers, David Lereah, NAR's chief economist, said higher mortgage interest rates were responsible for moderating sales, but noted it's important to keep an eye on the actual level of home sales given the market surge this year.

"The current pace of home sales activity remains historically strong -- only eight months have had a higher sales pace," Lereah said.

Mortgage rates in November were 6.33 percent according to Freddie Mac. That's up from November 2004 when rates were 5.73 percent.

While climbing mortgage rates may slow sales nationwide and slow the increase in home prices, Lereah says he expects the housing market to continue to expand. Some of the hottest housing markets have seen prices climb by more than 10 percent recently, but a continued slowdown in buying will likely have a similar effect on price appreciation.

"I truly believe the housing market will continue to expand. But rather than the double-digit price appreciation we've seen, we might see that drop to a 5 or 6 percent appreciation sometime toward the end of next year," Lereah told ABC News.

Lereah said the strongest markets like New York and San Francisco should remain strong, possibly pricing some younger buyers out of the market.

"Affordability is a problem. If you're in California, if you're in San Francisco, where the average home price is around $720,000, and you're young and you don't have that much money, you're going to be moving."

What does this mean? Last week, new home sales dropped 11.3 percent, the largest decline since January 1994. Coupled with today's report, do the falling sales numbers mean the housing market is about to "crash"? For the moment, probably not. Economists are still predicting that the housing market will show overall strong numbers for all of 2005. And prices for existing homes are still 13 percent above what they were last year.

That said, these are signs that the housing market may be slowing down from the record sales we have seen the last few years.

"What we are seeing in the housing market is an orderly decline," said Joel Naroff, chief economist at Naroff Economic Advisors.

Why the slowdown? Higher interest rates are the big culprit.

There could also be a further decline in sales because getting a loan might be harder for some people. Federal regulators, led by the Federal Reserve, recently proposed new lending standards that could ultimately lead to borrowers having a harder time getting riskier mortgage loans like interest-only loans.

According to the Mortgage Bankers Association, interest-only loans accounted for 23 percent of all loans between January and June of this year.

Is this something to worry about? High inventory levels could lead to a fall in prices over time. Currently, there is a five-month supply of existing homes for sale.

"We are still seeing everyone putting their homes on sale and [getting] high prices for it, but with the sales pace coming down and inventory rising, this is likely not sustainable. Inventory is likely to lead to a more sharp decline in prices over the next few months," Naroff said.

It's Economics 101. More supply could lead to lower prices as buyers now have more options.