Home sales are expected to set a new record this year, but rising interest rates should put a damper on sales in 2006, the National Association of Realtors reported today in its latest housing and economic forecast.

Median existing-home prices are expected to increase 12.5 percent this year to $208,400 while sales grow 4.2 percent, the association reported. “The forecast for home sales has trended up as the year progressed, fueled lately by added demand resulting from the impact of recent hurricanes.”

David Lereah, the association’s chief economist, said by June it was apparent that homes sales would likely set a new record. “Post-Katrina, our sales projections for this year have moved even higher,” Lereah said. “Short-term momentum is very strong, and our Pending Home Sales Index just set a record. In addition to the housing needs of hurricane victims, we may be seeing some ‘fence-jumping’ from home buyers who are getting into the market before interests rates move higher.”

New-home sales are expected to increase 7.1 percent to 1.29 million, and median new-home prices should rise 3.9 percent to $229,700, the association reported.

Total housing starts – single-family and multifamily – should be up 4.5 percent to 2.04 million units this year – the best showing since 1973 – and single-family starts are expected to set a record of 1.7 million.

“Inflationary pressures – driven by higher energy costs – have become a concern, so we anticipate two more hikes in the fed funds rate by the end of the year. In addition, long-term interest rates also are rising at a faster clip,” Lereah said. The 30-year fixed-rate mortgage is projected to reach 6.2 percent in the fourth quarter, and trend up to 6.7 percent by the end of next year.

Al Mansell, association president, said some easing in home sales is expected in 2006. “The rise in mortgage interest rates is likely to have a slight breaking action on the housing market, and the upside of that is it would help to bring the market closer to balance between home buyers and sellers,” he said. “As a result, there should be a cooling in the rate of price growth – on balance, the overall market should continue to favor sellers with price appreciation remaining above the high end of historic norms. The investment fundamentals for housing remain solid.”

In 2006, NAR expects the median existing-home price to grow by 5.2 percent and the median new-home price to rise 7.1 percent. Historic home-price gains are 1.5 percentage points above the rate of inflation, which is seen at 2.6 percent next year.

“Although energy prices are the chief culprit in current inflation concerns, we project oil prices to settle early next year – that would cause inflation to quickly dissipate,” Lereah said. The Consumer Price Index is forecast to rise 3.5 percent for all of 2005 before easing early next year.

Inflation-adjusted disposable personal income is expected to grow by 1.4 percent for 2005. The U.S. gross domestic product (GDP) is seen at 3.5 percent for all of 2005, with GDP picking up early next year as hurricane rebuilding accelerates. The unemployment rate is projected to average 5.2 percent for the next three quarters, then decline to 5 percent in the second half of next year.

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Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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