Steady As She Goes in February

The National Association of Realtors released the following report on February existing home sales in February.

WASHINGTON (March 23, 2006) – Existing-home sales rose in February following five months of decline, indicating a stabilization is taking place in the market, according to the National Association of Realtors®.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – increased 5.2 percent to a seasonally adjusted annual rate1 of 6.91 million units in February from an upwardly revised pace of 6.57 million in January, but were 0.3 percent below a 6.93 million-unit level in February 2005.

As always we invite you to our Chicago Home Buzz website and click on Market Stats for more market statistics.

Buying the Future of Real Estate

The Chicago Board of Options Exchange (CBOE) Futures Exchange (CFE) recently announced that it plans to launch futures contracts based upon median prices in the NAR existing-home sales data. Through a licensing agreement with NAR, CFE has created five new futures contracts designed to track the median price of existing-home sales nationally and in four distinct regions within the United States. CFE plans to launch the new contracts in the second quarter of 2006, pending regulatory approval.

“With the U.S. housing market valued at nearly $20 trillion, real estate is not only the hottest topic of conversation, it is an asset class unto itself that is arguably one of the most important segments of the U.S. economy,” said CBOE Chairman and CEO William J. Brodsky.

"CBOE gave careful consideration to the development of this contract to ensure that it had practical application for hedging as well as speculating, offering a chance to participate in the real estate market to a wide range of investors--whether your outlook is regional or national, bullish or bearish.”

All Eyes on Midwest & South

Is the housing sector becoming less sturdy? The final U.S. house-price data for the fourth quarter, released earlier this month, confirm that a robust uptrend was intact through December -- despite widespread perceptions of declines. But housing-sector data releases for the first quarter are telling a different story.

Action Economics still expect the cooling of the red-hot housing sector to be gradual, though the January sales reports, and a sustained downtrend in the Mortgage Bankers' Assn. purchase index, present some red flags for this vital segment of the economy.

URBAN-MARKET COOLING. The home-price data from the Office of Federal Housing Enterprise Oversight (OFHEO), which reflect a carefully constructed index based on "repeat sale" information, revealed a powerful 11.9% rate of price increase in the fourth quarter that was not significantly different than the 13% growth rate for prices in 2005 overall. The declines in widely watched monthly data on median home prices from the new- and existing-home sales reports -- which are notably not seasonally adjusted -- reflected nothing more than the usual seasonal weakness in the fourth quarter each year.

But the double-digit gains may be a thing of the past: We expect growth in home prices to pull back to 5% in 2006. The moderation should be led by a pause in price gains in the hot urban markets that saw big upward moves in 2005, with weakness that may be front-loaded in 2006, given housing market jitters in the first quarter. But steady price appreciation is likely in the rest of the country -- and that should drive ongoing price gains on a seasonally adjusted basis.

We assume that the 5% price appreciation in the OFHEO data for 2006 will correspond to more restrained 3% to 4% growth in the more volatile existing home-price measure, with growth in the second and third quarters that sharply outpaces the first- and fourth-quarter rates due to normal seasonal patterns.

REGION BY REGION. On a regional basis, price gains in the Midwest and South -- which account for a whopping 79% of the national new-home market -- have posted persistent and sustainable price gains through this expansion. These are likely to largely continue through 2006.

The slowdown for the year will mostly reflect moderating price growth in the Northeast and West. The latter two regional markets have each posted price gains that are not that unusual relative to each of their separate prior cyclical behaviors. But the recent gains are atypical in that they are both occurring at the same time.

This propensity for coinciding big price gains in concentrated urban markets is largely a global, rather than U.S., phenomenon. It's the expected coinciding moderation in both regions that runs the risk of having a national impact -- the separate corrections in the West in the 1980s and early 1990s, and the Northeast in the late 1980s, had no measurable effect on the rest of the economy as a whole.

JANUARY SURPRISES. The regional dichotomy in price movements is accompanied by a price dichotomy in new- vs. existing-home sales data as well. Surging new-home prices relative to existing homes in 2004 was followed by the reverse pattern in 2005. Much of the recent divergence has been consistently revised away in prior months through ongoing upward revisions in the new-home price data. As such, the persistent recent gap should be taken with a grain of salt.

The sales statistics from the new- and existing-home sales reports also remained robust through the end of last year, with the usual volatility. Both these reports revealed downside surprises in January that may signal that we're finally seeing the culminating effects of anecdotal evidence from industry sources through the third and fourth quarters of reduced pricing power, even if actual prices kept marching higher.

Major housing aggregates lost some upside momentum in the second half of 2005, and these reports are showing moderation in the first month of 2006. Despite the swing toward notably warmer weather in January from the bleak December, we got little of the bounce we thought would materialize in the reported figures. After pushing against capacity constraints through much of this expansion, the housing sector appears to finally be showing a little leeway as we enter the first quarter.

VOLATILE DATA. Housing-starts figures suggest that the recent moderation in activity largely reflected a big negative weather hit in the West in December, followed by lean figures elsewhere in January despite warm weather conditions. Activity remains remarkably robust in the South, which is where nearly half of the national housing market is located, and persistent strength here will limit any losses in the national housing statistics in 2006.

A bounce in the February housing data could reverse conclusions drawn from the January data, though both the pending home-sales data and MBA purchase data suggest a weak round of February figures as well.

The MBA new-purchase data may provide a more ominous reading on prospects for the February housing data. There, we've seen a sharp downtrend through the most recent week ending Mar. 3. Yet, these data are volatile, and have shown a bout of weakness at some point in the annual seasonal "lull" in each year of this expansion. As with the pending home-sales figures, the numbers provide just one indication of downside risk in the February numbers. With increasing jitters about the health of the housing sector, these data will be closely watched as we approach the seasonally critical second-quarter period.

Appreciate Your Home

The government released the latest fourth quarter data on appreciation of home value throughout the US and on average found a continued steady rise in home value as compared with the year prior. While this data reflects on a strong end to 2005, the 2006 first and second quarter data will important to determine the effect the slowing market will have on this appreciation index.

Adding proof that the recent slowdown of home sales has yet to affect prices, the average U.S. home continued to add value through the end of 2005, posting a 4th quarter increase of nearly 13 percent from the fourth same period in 2004, according to just released data from the government (www.ofheo.gov)

In the home price survey by the Office of Federal Housing Enterprise Oversight, all but one of 275 metropolitan housing markets showed improved value.

For more specific information on your state or region, log on to www.rememberjim.com and go to the market stats area.

Slip in rates eases inflation pressure

News released that retails sales were way down last month had an immediate effect on long term interest rates causing them to lower slightly. It was also announced this easing may have a postive effect on inflation concerns with the likelihood now reduced. We'll keep an eye on the rates and the market stats and post something when we see a change. Chicago was down 0.04% to 6.57% on average for a 30 year fixed mortgage. This is good news for the housing industry, but I wouldn't wait too long as the rising rates are almost inevitable to keep the inflation in check.

New Balance in '06

Here is a report similar to what I have been saying about the slowing real estate market and the effect on the economy released by the National Association of Realtors:

A lower level of home sales expected this year will create a more level playing field for buyers and sellers on the heels of a five-year sellers’ market, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, said the number of homes on the market has been improving nicely. “The cooling from overheated sales conditions in recent months is helping to bring inventory levels up to the point where buyers have more choices than they’ve seen in the last five years,” Lereah said. “Annual price appreciation is still running at double-digit rates, but the cause of those sharp increases is going away. As the market readjusts, price appreciation should return to more normal rates of growth this year.”

The national median existing-home price for all housing types is projected to rise 5.8 percent in 2006 to $220,300. The median new-home price should increase 5.4 percent this year to $250,200.

Existing-home sales are expected to fall 5.7 percent to 6.67 million in 2006 from the record 7.08 million last year. At the same time, new-home sales are forecast to decline 7.7 percent to 1.18 million from a record 1.28 million in 2005 – each sector would be at the third highest year following the tallies for 2005 and 2004. Housing starts are likely to total 1.98 million this year, down 4.3 percent from 2.06 million in 2005.

NAR President Thomas M. Stevens from Vienna, Va., said some home buyers and sellers have unrealistic expectations. “Some sellers in markets that have had rapid appreciation are listing the price of their home too high, but those homes are just languishing on the market,” said Stevens, senior vice president of NRT Inc. “At the same time, some buyers who have believed hype about a housing bubble are hoping prices will drop, but that’s not happening either.

“Consumers need professional assistance to understand and negotiate the current market realities. Sellers should listen to their agent’s advice to competitively price and show the home, and buyers may want to choose a buyer’s agent to represent their interests and help them negotiate favorable terms. Today’s market has changed a lot from the conditions we’ve seen during the last five years.”

The 30-year fixed-rate mortgage should increase gradually to 6.9 percent in the fourth quarter.

Inflation as measured by the Consumer Price Index is projected at 3.3 percent this year. Inflation-adjusted disposable personal income is expected to grow 3.7 percent in 2006.
Growth in the U.S. gross domestic product is forecast at 3.5 percent in 2006, while the unemployment rate is seen to average 4.8 percent this year.

--NAR

FSBO Saving or Losing?

Some recent data released by the National Association of Realtors show that people who attempt to sell their homes by themselves are getting a median sale price of $198,200 as compared with those who used a broker, whose median sale price was $230,000. That's over 16% difference!!! The report also showed discount brokers with limited services averaged slightly lower sale prices than brokers, however, their market time was over 17% longer.

I understand the logic of the FSBO, especially in the hot market we are coming out of when average and even below average agents were selling homes due to the tilted demand for housing. Now, however,the market is shifting, and their is no doubt in my mind that if you use a professional realtor whose marketing skills are truly professional and don't only comprise of putting the for sale sign out front, you will actually reap more profits in the long run with faster sales (on average).

Your Agent Matters

Mortgage Rates Lower (Slightly)

edgeio-key: 5e79e78736bdcd599cdfde543f77627063aa227a "Consumer confidence slipped in February to the lowest reading in three months, but manufacturing activity appears to have strengthened last month. On net, the latest economic news had little effect on mortgage rates this week," said Frank Nothaft, Freddie Mac vice president and chief economist. "Over the past five weeks, mortgage rates have remained within a narrow range of 0.1 percentage points around this week's averages. Our forecast calls for rates on 30-year fixed-rate mortgages to increase about one-quarter of a percentage point by the end of the year.


"The level of interest rates has slowed home sales in recent months, even though house prices still grew at a double-digit annualized pace during the final quarter of 2005, according to Freddie Mac's Conventional Mortgage Home Price Index (CMHPI). Since the average time homes are on the market is near a three-year high, house-price growth should slow to single-digit figures, which is consistent with historical periods," Nothaft added.

Other analysts are predicting a 0.5 percentage increase in mortgage rates, still at a historically low levels.

As always, for more information on market news in the Chicago real estate market, please visit http://www.jimgramatahomes.com