The Cool Continues: Home Sales Slow

Jan. 25, 2006 — -- The National Association of Realtors said that sales of existing homes declined in the month of December. This marks the third month in a row that existing home sales have declined.

The industry trade group said that sales of pre-owned homes sold at an annual rate of 6.6 million, which was below market expectations of 6.9 million homes. That is a 5.7 percent decrease from November's (revised) figure of 7 million homes sold. It also represents a decrease of 3.1 percent from December 2004 sales.

That said, 2005 set a record for the number of existing homes sold. More than 7 million homes were sold during the year, up 4.2 percent from 2004.

The median price for a home sold last month was $211,000, down $4,000 from the previous month but up 10.5 percent from a year ago.

"With the supply of homes improving and buyers having more choices, the rate of price growth should come down to more normal levels this year," said NAR President Thomas Stevens in a prepared statement.

"This is part of the market adjustment we've been discussing. With a soft landing in sight for the housing sector … we expect the housing market to remain historically high but lower than last year's record," David Lereah, NAR's chief economist, said in a release.

Mortgage rates in December were 6.27 percent, down slightly from November's 6.33 percent rate, according to Freddie Mac. Interest rates were 6.10 percent last week, according to Freddie Mac.

So what does this mean? As analysts had predicted for 2005, sales of existing housing showed strong results. But it is becoming more and more apparent that a slowdown in the housing sector is happening.

Increases in housing prices are slowing. Sales are slowing. Inventories are increasing.

All these facts point to what economists at Bear Stearns succinctly summarized: "more evidence that the housing market has cooled since the summer."

The sales reductions varied widely by region. In the West, sales dropped 11.4 percent. In the South, they were down 7.2 percent and in the Midwest, 2.6 percent. In the Northeast, sales were unchanged.

The question now is whether the continued slowdown in the once red-hot housing sector will be orderly or lead to an industrywide burst. We'll have to wait and see what the rest of 2006 holds.

Ian Shepherdson of High Frequency Economics is pessimistic.

"The housing market is a bubble, and it will burst," he said. But that's only one opinion. Others are more optimistic and see an orderly decline in housing prices.