Home Sales Market Stays Hot

April 27, 2005

National Housing Market Stays Hot Despite Predictions That Sales Would Slow in 2005

Martin Crutsinger
AP Economics Writer

WASHINGTON (AP) -- After four record-breaking years, home sales were supposed to slow in 2005 under the weight of rising interest rates. But so far, the red-hot market keeps getting hotter. "Phenomenal. I am speechless," said real estate agent Maurice Veissi of Miami, who has been selling homes for 33 years. "I have never seen a market as robust for as long a period of time as this one."

In Danbury, Conn., agent Allyson J. Bernard said she was looking for very good spring sales.

"We are coming out of hibernation," she said. "It was a very long, cold winter but we expect the spring to be active."

And it's not just in Florida and Connecticut. The government reported Tuesday that purchases of new single-family homes shot up 12.2 percent in March, the biggest percentage gain in more than a decade. The big gain pushed sales to an annual rate of 1.43 million units, the highest in history and well past the 1.3 million rate set last October.

The March surge surprised analysts. They had been forecasting sales would decline around 2 percent last month, reflecting the rise in mortgage rates during the month. The 30-year mortgage rose at the end of March to 6.04 percent, the high so far this year.

Analysts were also wrong about the resale market. Instead of the tiny 0.1 percent gain forecast, sales of existing homes and condominiums rose by 1 percent to a seasonally adjusted annual rate of 6.89 million units, the third highest level in history, the National Association of Realtors reported Monday.

Many analysts said part of last month's gain in new home sales was probably spurred by mortgage rates creeping up, which prompted some fence-sitters to jump into the market before rates went even higher.

But now rates have turned back down again, a development that many economists believe will support further gains in home sales in coming months.

A nationwide survey done by Freddie Mac showed rates on 30-year, fixed-rate mortgages have fallen for three straight weeks to 5.8 percent last week, very close to their low for the year of 5.57 percent in early February.

But analysts cautioned that any number of factors could alter their interest rate predictions. The Federal Reserve could decide to abandon its gradual interest rate increases and adopt more aggressive credit tightening for fear inflation is getting out of hand. Or the Chinese could decide to stop recycling massive amounts of dollars earned in foreign trade into purchases of U.S. Treasury securities, an activity that has helped lower U.S. interest rates.

When mortgage rates and other rates set by financial markets start rising, the impact on the housing market will depend on how fast and how far rates go up, analysts said.

Mark Zandi, chief economist at Economy.com, said he believed that 30-year mortgages will be at 7 percent a year from now. He said under that scenario the most significant impact will be a flattening of home prices in the hottest markets.

Existing and new home prices have been turning in double-digit price gains compared with nationwide levels of a year ago, with even bigger increases in selected markets.

But Zandi said if mortgage rates go up to 7.5 percent or 8 percent, they could have a more significant impact, sending home prices down in some of the hottest markets like California, Florida, parts of Nevada and Arizona and the Northeast corridor from Boston to Washington.

"We could hear some bubbles bursting," Zandi said, referring to the worry of some economists that housing prices in some areas have been exhibiting the same speculative excesses that were seen in the stock market before that bubble burst in 2000.

But Zandi and other analysts said if interest rates rise only modestly -- many believe the 30-year mortgage will only be at 6.5 percent in December -- then sales of both new and existing homes could set a record for a fifth straight year.

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