New home sales soar but slowdown expected

Published: Tuesday, February 1, 2005 at 6:01 a.m.
Last Modified: Tuesday, February 1, 2005 at 12:22 a.m.
WASHINGTON - Sales of new homes rose to an all-time high in 2004, the fourth straight annual record. But activity in December barely budged after a big drop the previous month, suggesting the nation's red-hot housing market may finally be cooling.
The Commerce Department reported that sales of new single-family homes climbed 8.9 percent for all of 2004 to a record high of 1.18 million, up from 1.09 million in 2003.
But sales rose a lower-than-expected 0.1 percent in December after having fallen by 13.1 percent in November.
Sales of both new homes and previously owned homes have set records for the past four years as home buyers have enjoyed the lowest mortgage rates in their working lifetimes, making housing one of the standout performers for the economy.
''We have had a tremendous success story in housing,'' said David Seiders, chief economist at the National Association of Home Builders.
Economists credit the strength in housing over the past four years to the aggressive credit easing undertaken by the Federal Reserve in 2001 as it fought first to counteract the impact of the country's first recession in a decade and then to stabilize the economy after the terrorist attacks of that September.
However, since last June, the Fed has been gradually raising its benchmark federal funds rates, pushing it from a 46-year low of 1 percent, to 2.25 percent currently with another quarter-point increase expected from the Fed this Wednesday.
So far, the Fed's rate hikes have had little impact on mortgage rates with 30-year fixed-rate mortgages last week dropping to 5.66 percent, compared with 6.25 percent in late June when the Fed started boosting rates.
Many analysts believe it is only a matter of time, however, before the Fed's movement of short-term rates will begin to push up long-term rates.
Seiders said he believed rates on 30-year mortgages will be around 6.5 percent by the end of this year. He said this increase will trim new home sales by around 3.5 percent this year, still giving the country the second-best level of new home sales on record.
David Lereah, chief economist for the National Association of Realtors, forecast that sales of existing homes, which rose 9.4 percent last year to a record high of 6.68 million units, will also drop by around 3 percent, giving the resale market its second best year in history.
But if mortgage rates go up faster than now expected and top 7 percent by the end of the year, analysts said that would put a bigger dent in housing than they are now forecasting.
''Two months may not make a trend, but the slowdown in new home sales at the end of 2004 is something to watch carefully,'' said Joel Naroff, chief economist at Naroff Economic Advisors.
The softness in sales is likely to be accompanied by a slowdown in the rate of increase for housing prices, which have been surging in recent years.
For 2004, median new home prices rose by 12.3 percent to $218,900, from $195,000 in 2003. The median is the midpoint where half the homes sell for more and half for less.
Seiders predicted the price increase would be a slower 5 percent in 2005, but he said he did not see evidence of a bubble in the housing market similar to the stock market bubble of 2000 that saw a huge run-up in prices reverse dramatically.
In other economic news, the Commerce Department reported that Americans' personal income, boosted by a large dividend payment from computer giant Microsoft Corp., rose by a record 3.7 percent in December.
That helped boost consumer spending by a solid 0.8 percent during the all-important holiday season.
The government said the increase in incomes would have been a much smaller 0.6 percent without the one-time $3 per share dividend payment Microsoft made last month.
While it is highly unusual for a dividend payment from a single company to have such a major impact on incomes, Microsoft is one of the most widely held stocks in America.
The size of the payment - $32 billion - rivaled the $38 billion the government paid out in federal income tax rebates in the summer of 2001.
Analysts said they did not believe the Microsoft payment would have the same impact as the 2001 tax rebates because much of the dividend will simply be used by stockholders to buy more shares of Microsoft.
For December, new home sales were up 55.5 percent in the Midwest and 6.3 percent in the West. Sales fell by 16.3 percent in the South and were down 15.7 percent in the Northeast.

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