Housing Market Strong but Slowing

The U.S. housing market remains strong but is chilling a bit, with the annual rate of July home sales falling 2.6% from June, the National Association of Realtors said Tuesday.

At the same time, the NAR and the Mortgage Bankers Association — two leading industry trade groups — joined Federal Reserve Chairman Alan Greenspan and others in adopting a more cautious view of the high-priced housing market.

July’s home sales, which fell to a 7.16 million annual rate from a 7.35 million rate in June, still was the third-highest in NAR records.

But prices keep rising. The median price of single-family homes and condominiums jumped 14% from a year ago to a record high of $218,000, the NAR said.

“The markets still are very healthy and the fundamentals are still there,” says David Lereah, NAR’s chief economist. “But there certainly has been a slowing in the housing market, like air coming out of a balloon.”

If the Fed keeps increasing interest rates, Lereah predicts “a soft landing” for housing, with home sales and prices slowing to single-digit growth rates.

In another sign that the market might be cooling, the inventory of houses for sale rose 2.6% in July to 2.75 million homes — a nearly five-month supply, the NAR says. Despite record sales, the inventory of homes has soared 12.6% this year, says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “With so many homes on the market,” he said in a statement Tuesday, “the risk of a meltdown if mortgage rates jump is increasingly sharp.”

Earlier this year, Greenspan warned that home prices are “unsustainable” and there’s speculative “froth” in some local real estate markets.

Some economists predict that the housing market is an investment bubble ready to burst. If that happens, it could dampen consumer spending and shrink the economic growth rate by 1 to 2 percentage points.

The trade groups for the Realtors and mortgage bankers are warning consumers to think carefully before leaping into potentially risky home financing.

The housing market has rocketed since the late 1990s because of job growth, rising household income and mortgage rates below 6%.

But economists and bankers are getting nervous about the wide use of higher-risk financing, such as interest-only mortgages, adjustable-rate mortgages and so-called subprime mortgages for low-income home buyers.

The NAR recently issued a warning about the use of what it calls “specialty mortgages.” On its website, the group advises home buyers to “do your homework first” to avoid payment shock or seeing their mortgage payments suddenly leap as interest rates rise.

Easy financing helps people buy homes, but also raises foreclosure risks, says chief economist Doug Duncan of the Mortgage Bankers Association.

Duncan and the mortgage bankers’ group, which released a housing report Tuesday, predict that housing sales and prices next year will slow to single-digit growth rates. Growth in the economy, household incomes and business investments should offset the risks of a housing meltdown, Duncan says. U.S. home prices have fallen only in three or four quarters since World War II, he says.

Today, the Commerce Department is expected to release new-home sales figures for July.