Best-case scenario for housing next year Part 1: 2006 real estate forecast
By Janis MaraInman News
Editor's note: This is the first part of a two-part story looking at housing market conditions for 2006.
"Moderation in all things." -- Aristotle
As John and Jane Doe Home Buyer enter the year 2006, driving their Ford Focus down Main Street, they see a moderate number of townspeople buying lunch boxes and new work clothes, signifying modest job growth. As they pass a local bank, the automated ticker display registers interest rates at 6 percent. Best of all, flyers in the window of the local real estate brokerage show house prices reflecting modest appreciation.
At least, that's the best-case scenario for 2006 predicted by experts consulted by Inman News. Not only that, many of them said they believed this scenario was likely.
"A situation where the U.S. economy continues the modest job growth it has produced over the last year is the best-case scenario," said Mark Dotzour, chief economist at Texas A&M University's Real Estate Center.
"Modest job growth creates underlying demand for housing and very little threat in the way of inflation," the economist said. "That's what keeps interest rates at low levels like the ones we've enjoyed for the last five years. If we have moderate job growth resulting in low inflation and in turn a low mortgage interest rate environment, the U.S. will have another successful year."
The best thing that could happen in 2006? Continuation of low interest rates, according to Mike Sklarz, chief valuation officer for Fidelity National Financial. Also, a recovering economy, "which we seem to be in the midst of in a number of sectors," and a rebound in consumer confidence, Sklarz said.
"My guess is that prices will keep going up but at a slower rate," Sklarz said. "Some markets showed double-digit rates of appreciation this year. The more likely appreciation rate is in the single digits in 2006."
David Lereah, chief economist of the National Association of Realtors, also believes there will be "modest cooling."
"The market will be coming off of a five-year boom and experience a soft landing next year," Lereah said in a 2006 forecast released in late October.
"An uptrend in mortgage interest rates will cause some slowing of the sales pace, but we forecast 2006 to be the second-highest year on record and housing will continue to support the overall economy," Lereah said.
Lereah predicts that the national median existing-home price for all housing types, after jumping about 12.4 percent to $208,100 for all of this year, will grow by 5.3 percent in 2006 to $219,200.
Historically, home prices grow 1 to 2 percentage points faster than the rate of inflation. The Consumer Price Index is likely to rise 3.4 percent this year, and then ease to an increase of 2.7 percent in 2006.
James Barth, senior fellow at the Milken Institute and finance professor at Auburn University, said, "The best we can hope for is more of what we had," evoking the image of 2005's record-breaking market.
"I don't think there's going to be a housing bust at all," Barth said. "I think there will be a soft landing."
According to Barth, "The best-case scenario would be growth in the economy without inflation worsening," though fast growth could worsen inflation and perhaps trigger further increases in interest rates and adversely affect housing.
"In my opinion, the best case would be a mild softening of sales prices and a slight increase in inventory levels," said Steve Ozonian, CEO of Global Mobility and industry veteran. "We're absolutely going to see inventories rise a little bit. We're going to see prices stabilize, but if interest rates stay at the current level, they're still historically attractive.
"As long as employment is on the upswing and interest rates stay at an affordable level, there's no reason to believe the market won't continue to flow very nicely," Ozonian opined.
Joining the chorus of moderates, Christopher Cagan, director of research and analytics at First American Real Estate Solutions, said, "The best scenario would be to go back to a healthy, normal, sustainable market going up 6 percent, 8 percent (home prices), with mortgage interest rates remaining where they are or perhaps a little higher."
Predicting a 5 percent growth in house prices nationwide, Cagan said, "I wouldn't mind if California slowed down (in price appreciation). That would be good for California," referring to the state's hot - indeed, according to some, overheated - market.
"California, Florida, Las Vegas have their cycles," Cagan said, referring to the fact that all three have experienced record activity in recent years. "Any market where prices have doubled in five years can have a correction. I don't think it will be a terrible one. It will not impact the overall market dynamic."
While the demand for houses in Florida and California will remain strong, price appreciation will slow in those areas, said James Wright, president/principal broker of Century 21 All Islands in Honolulu. "California is experiencing more inventory on the market and the price point will follow."
Perhaps the most starry-eyed - or, rather, sunny-eyed - optimist of the group was Wright.
Though prices went up 30 percent in the last two years, Wright is positive that double-digit appreciation will continue in his market in 2006 - indeed, for a number of years to come.
"The baby boomers are out there, they've had a lot of good years of earnings, they've inherited wealth," Wright said. "They are buying trophy homes and will be for years. We are one of those places people dream of. They come here to buy a piece of that dream."
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