“The sky is falling! The sky is falling!”
Not so fast, Chicken Little. Though it's becoming increasingly clear that the housing market is undergoing some degree of adjustment in most metro areas across the country, with sales moderating and inventory edging upward, you may not want to flee the coop quite yet. Mortgage rates are increasing, but are doing so very gradually, and the economy has been showing encouraging signs of strength. Many real estate investors have undoubtedly been eyeing the Dow Jones industrial average as it gleefully surpasses the 11,000 mark. Should a glut of those investors decide to unload property this year in order to put that money into stocks, it may make 2006 a great opportunity for potential home buyers.
In addition to the unpredictability of investor activity, consumer psychology could also play a significant role this year in terms of market activity. Consumer confidence has been on the rise in recent months, and as long as potential home buyers stay positive, purchase activity should remain at a historically strong level in 2006, albeit off 2005 peak levels. A potential concern is that overzealous media coverage of changing market conditions could lead to home buyers feeling paralyzed in their purchase decision and result in a period of volatility in the marketplace. Should this occur in some areas, it could cause short-term price declines as panic-stricken sellers drop their asking price in order to unload their homes. While this is a definite possibility in some markets, the underlying strength of the economy should lead home buyers back to the market once their concerns have been assuaged, and prices should stabilize by year's end.
One of the most significant factors that not only affects consumer psychology but also housing affordability is the 30-year mortgage rate. The rise started in September, and rates have since reached a plateau near 6.3 percent for the past several months, according to Freddie Mac's Primary Mortgage Market Survey. They will probably hover in this range as the market readjusts, but are likely to resume their slow creep upward sometime this year. The spread between 1-year adjustable rates and the 30-year fixed rate has continued to narrow, shrinking to just 91 basis points in February, indicating short-term rates have risen faster than long-term rates, which will mean continued upward pressure on the 30-year rate. But despite the increases, most forecasts call for the average annual 30-year rate in 2006 to stay below 6.5 percent. This means that for every $100,000 borrowed, the monthly principal and interest payment shouldn't increase more than about $40 in 2006—not an insignificant figure, but not so large as to dramatically alter the demand landscape.
Expect some volatility in 2006 as consumers and investors respond in a variety of ways to changing market conditions, but don't worry—so long as the economy continues to perform well, the sky won't be tumbling down this year. —Jonathan Dienhart heads the Published Research group for Hanley Wood Market Intelligence, a division of PROSALES' parent company, Hanley Wood, LLC.
Hanley Wood Market Intelligence provides data and consulting services on residential real estate development and new-home construction, including analysis of key trends impacting the housing market through its proprietary software products and research reports. Contact: 800.639.3777. www.hanleywood.com/hwmi.