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December 12, 2005

Good News For Many, If True

If this is true, it could be good news for those of us wishing to buy a house as a home rather than as an investment.

Sales of new homes jumped to an all-time high in October in what could be a final spurt from a housing market that is expected to slow after five record-breaking years. The Commerce Department report released Tuesday showed sales of new single-family homes climbed to a record annual rate of 1.42 million units last month. The 13 percent increase from September was the largest percentage gain in more than 12 years.

Analysts said the unexpected surge was probably influenced by fence-sitters rushing to buy homes before mortgage rates climb higher.

"The housing market is peaking despite what today's data suggest," said Mark Zandi, chief economist at Moody's Economy.com.

He said part of the rise in October could have occurred because worried builders have started cutting prices and offering other incentives to move unsold homes.

Home values are not a tangible phenomenon, nor is there any precise formula that can be applied to them. They are a product of the marketplace and therefore completely reliant on the good old concept of supply and demand.

When there is a strong demand, everybody on the selling end cashes in; Realtors make more money on their average 6% fees, sellers make a bundle in profits based on their initial investments in the properties and on the buyers' end, banks make the money by raising mortgage rates to take advantage of the demand -- in a manner of speaking, they are the pilot fish of the transaction, though their necessary function brings them a much better return than that enjoyed by their cousins whose only satisfaction is that of a job well done in the cleaning of a shark's teeth.

When the price of a house becomes prohibitive to all but a few and the cost of borrowing the money to buy increases along with it, the "buy as an investment" crowd becomes cautious because they see their potential for earning a substantial "hold on to it while prices go up, then sell it" profit margin begin to dwindle.

That's pretty much what's happening now, so,

Economists believe the momentum so far this year will result in a fifth year of record sales for both new and existing homes in 2005, but they forecast sales declines in 2006 as potential buyers react to sustained increases in mortgage rates.

Rates for 30-year mortgages have been above 6 percent for seven consecutive weeks and economists are predicting they will rise even higher in coming months as the Federal Reserve keeps raising rates to combat inflation pressures.

Patrick Newport, an economist at Global Insight, a private research firm, predicted that sales of both new and existing homes would drop by around 10 percent next year.

"We are not expecting a crash or anything dramatic but a slowdown from the sizzling numbers that we have been seeing," he said.

On the other hand,

The concern of some economists is that the booming housing market could have a bigger downturn similar to the bursting of the stock market bubble in early 2000.

The worry is that activity in recent years has been pumped up by investors buying homes and condominiums in hopes of quick gains. If they suddenly decide to dump those properties, it could cause a glut on the market that would further depress prices.

What is indicated here, if the "experts" are correct, is that the seller's market that now dominates the real estate industry in most of the United States is about to become a buyer's market, which will move home buying out of the short to midterm investor's court and into that of the "common man."

Posted by Seth at December 12, 2005 01:43 AM