Will the Olathe housing market slow down in 2006?

As Predicted, NAR Sets Fifth-year Sales Record -- What's Next?
By Blanche Evans

Despite a nearly six percent decline in home sales in December 2005, existing housing sales easily set a fifth annual record, but what does 2006 hold in store?

Total existing-home sales, which include single-family, townhomes, condominiums and co-ops, were up over 4 percent for 2005. Over 7 million homes were sold, up from 6.8 million in 2004.
David Lereah, NAR's chief economist, says he expected the monthly sales decline. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector," he said. "The level of home sales activity is now at a sustainable level, and is likely to pick up a bit in the months ahead. Overall fundamentals remain solid, driven by population and employment growth as well as favorable affordability conditions in most of the country, so we expect the housing market to remain historically high but lower than last year's record."
The national median existing-home price for all housing types was $211,000 in December, up 10.5 percent from December 2004 when the median was $191,000. The median is a typical market price where half of the homes sold for more and half sold for less.

But this may be the last year that housing sees double-digit gains for a while.
NAR President Thomas M. Stevens from Vienna, Va., said it may take a while for home price growth to cool. "We're coming off of five years of tight supply, and many sellers are accustomed to expecting very strong price gains and exceptional returns on their investment," said Stevens, senior vice president of NRT Inc. "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."
Currently, says the NAR, there's a 5.1 supply of homes nationwide at the current sales pace, which is getting close to the 6-month benchmark of a "normal market," which neither overfavors the buyer or seller. Below six months of inventory, homes are said to be in a seller's market, where conditions favor the seller due to demand. Above six months, conditions favor the buyer, due to increased inventory.

Is it time to panic? Will sellers be unable to sell their homes?

"The sky is not falling in the housing markets, only cooling," reasons Lereah. "After five years of record-breaking performances, the housing sector is taking a breather -- home sales are falling and price appreciation is slowing. The great fundamentals that were in place that initially generated the boom -- historically low mortgage rates, favorable demographic trends (substantial home buying from boomers, immigrants and boomer children), and reduced home buying costs from technology innovation (Internet home search and mortgage application and closing processes) are still in place today."

Interest rates, according to Freddie Mac, are dropping. The national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.27 percent in December, down from 6.33 percent in November; and is 6.10 percent currently.

"If lower interest rates are sustained, the housing market could see some unexpected lift," Lereah says.

Yet, according to the California Association of Realtors, home prices are rising, but sales decreased nearly 18 percent in December. Why are sales trending toward softening?
"As the boom winds down, investors are exiting the markets, cleansing the speculative element in housing," explains Lereah. "There may be a handful of interest-sensitive local hot housing markets that experience a short-term contraction, but for the nation, as a whole, the boom is winding down to an expansion."

RE/MAX chairman, Dave Liniger predicts 2006 will be the second best year the real estate industry has ever experienced.
"I don't think the last two months are anything worse than a normal cycle of the real estate business. November and December declines were a normal reaction to fluctuating interest rates. This year we would anticipate that resales will probably drop 4 to 5 percent from the record pace that they were last year. I think we are going to see an outstanding year for the real estate business."

Like Lereah, Liniger expects housing prices to retreat more in some parts of the country than others, but for most regions, housing is unlikely to show a dramatic collapse, although he suggests, "You do certainly have to be a little concerned with properties that have shown double digit appreciation on both coasts."

He says the market will be much more "normal." "You're going to see price appreciation, depending upon the region you're in, somewhere between three and six percent."
One of the reasons that the housing market has been on a record setting pace is historically low interest rates. Liniger believes that rates may climb somewhat in the upcoming year, but not enough to derail the real estate market. "I think you're looking at very reasonable rates in the neighborhood of six-point-five percent before the year is over."

For clues to the future, Liniger advises keeping watch on the Baby Boomers. "They'll continue to keep the market hot," he predicts. "They see real estate being a very, solid investment, unlike recent experiences in the stock market. So, I think you're going to see second home sales continue to be very, very strong."

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