Mortgage finance company Fannie Mae predicted that U.S. home sales are set to decline by as much as 10 percent in 2006 as higher interest rates and housing market jitters reverse a five-year run that helped fuel consumer spending and economic growth.
Fannie Mae economists said their “best guess” is that sales will fall 8.4 percent, to 7.62 million units. That would be the first annual decline since 2000, said David Seiders, chief economist of the National Association of Home Builders.
But even Fannie’s predicted level for 2006 would be the third-strongest year on record for home sales.
Purchase originations and refinance activity are also likely to drop off, the economists said. They predicted purchase originations will dip 2.3 percent to $1.45 trillion. Refinance activity will fall 51.6 percent to $653 billion, economists David Berson and Molly Boesel said.
“Despite a surprising jump in new home sales for October, the housing market likely has peaked,” they said in a semiannual housing survey.
Berson and Boesel said home-price gains are expected to “slow sharply” in 2006, down to about 3 percent after a couple of years of double-digit growth.
The adjustable-rate mortgage share of loans is expected to stay at about 30 or 31 percent, the Fannie Mae economists said. They don’t predict an increase in the use of fixed-rate mortgages until home-price gains moderate for several years.
The U.S. housing market and homebuilder stocks have posted steady gains in recent years on solid demand for homes and low mortgage rates, but some analysts have been expecting a pullback.
A volatile homebuilder sector is down from all-time highs reached last summer, but has rebounded since November.
Investors have been closely watching data from the housing market and homebuilder quarterly earnings with construction becoming a key driver of the U.S. economy and the Federal Reserve worried about a “frothy” housing market.
Not all the news is negative. Construction of new homes rose 5.3 percent in November from the previous month’s revised figure to a seasonally adjusted annual rate of 2.123 million units, the Commerce Department said.
That may suggest that predictions of a downturn may by overblown.
“The housing market still is fundamentally healthy,” said Dave Wilson, president of the NAHB, in a statement.
Yet he noted “many builders sense some tapering off of buyer demand because of resistance to high prices and rising interest rates … and many companies have begun offering certain incentives in order to maintain their sales and production.”
Meanwhile, the NAHB said its confidence index fell to 57 from December from 61 the prior month, its lowest level since April 2003.
Homebuilders are “reacting to higher interest rates and energy costs, along with some buyer resistance to high house prices,” said Wilson at the NAHB.
Standard & Poor’s equity analyst Bill Mack said of homebuilders he remains “pretty positive on the group, with more positive recommendations than negative,” citing solid quarterly earnings posted recently by Lennar Corp. and KB Home.
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“We think the large builders will continue to take market share and grow volume, even though there’s evidence that home prices are starting to slow,” Mack said.
He forecast profit growth for big builders in the range of 15 to 20 percent, and he said even that may be conservative.