Near-term housing indicators remain at historically elevated levels as evidenced by the National Association of Realtors' upward revision of its home sales forecast last week. The Mortgage Bankers Association also projects increased home sales going forward.
The National Association Realtors forecasts existing home sales to increase 4.2% to 7.07 million in 2005 while new home sales are projected to rise 7.1% to 1.29 million. Total housing starts should gain 4.5% to 2.04 million units in 2005 - the highest on record since 1973 - while single-family starts are expected to set a record of 1.70 million. The Pending Home Sales Index has just set a record as well.
Meanwhile, National Association of Realtors also stated that the national median existing-home price for all housing types is set to rise 12.5% this year to $208,400, while the median new-home price should increase 3.9% to $229,700.
National Association of Realtors spokesman Walter Molony said that sales are going to be boosted by Katrina-related buying and by fence sitters who are jumping into the market before rates really rise. "There's a cloud of Katrina hanging over the data," he said, explaining that in the hardest-hit areas, there has been little to no buying activity. So even if the reported numbers have not been hindered by seasonal factors, the reporting sample for the South is artificially deflated because the sources of the data were damaged or destroyed - 28,000 realtors have lost homes and jobs as a result of Katrina. "The question is how much is being offset by spiking sales in nearby areas that escaped heavy damage," Molony said. "The sense is that there are many unplanned purchases by displaced residents, and that it is greater than what is not taking place in the disaster zone."
The MBA is also projecting home sales to rise. Total existing home sales are projected to rise to 7.037 million in 2005, versus 6.784 million in 2004, while new home sales are expected to increase to 1.261 million this year from 1.203 million last year.
Continued robust home sales suggest that the housing turnover component of prepayments will stay near recent strong levels (on a seasonally adjusted basis). Michael Bykhovsky, CEO of Applied Financial, explained that as rates back up, the only prepayments observed are turnover related. To model this, many prepayment analysts use historical data reaching as far back as 10 years. The problem with using this approach is that housing sales then were much lower, thus leading these analysts to underestimate turnover related prepayments. Housing turnover prepayments going forward would probably be 60% to 70% higher than 10 years ago, given a similar relationship of coupon and mortgage rates and considering the unprecedented growth in home sales, Bykohvsky said, adding that a robust model should reflect that.
He also noted that in the past, home sales were driven by three factors: population mobility, wealth formation and intergenerational transfers. If only the first and third factors were dominant, home sales would have been fairly stable. During the 1990 stock market boom, wealth formation became a big factor. Recent astronomical home sales growth, Bykhovsky said, could probably largely be explained by home price appreciation, which is the only unusual variable within the last 10 years, although there could also be social or other factors as well, that are not clearly visible in the statistics, that could be important. Market participants relying on purely statistically based historic models are very likely under-projecting the effects of the housing market structural change, he said.
Despite the numbers trending up this year, some slowdown is expected next year. By contrast to the 12.5% existing home price appreciation expected for this year, the National Association of Realtors is predicting median existing home prices to gain by 5.2%, while the median new home price is expected to increase 7.1%. Further hindering home sales would be the expected rise in 30-year fixed mortgage rates, projected to reach 6.2% at the end of 2005 and 6.7% at the end of next year.
The MBA predicts total existing homes to decrease to 6.790 million in 2006 from 7.037 this year and new homes to decrease to 1.220 million in 2006 from 1.261 million in 2005.
MBA home sales projections (Oct. 12)
2004 2005 2006
Total Existing Homes 6,784 7,037 6,790
New Homes 1,203 1,261 1,220
Median Price of Total Existing Homes (Thous $) 185.2 206.3 218.2
Median Price of New Homes (Thous $) 221.0 229.4 241.1
Source: Mortgage Bankers Association
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