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A Toast to 2006 -- Two Toasts to 2007!

The year will end with existing-home sales 9 percent lower than in 2005 and home-price appreciation closing out the year essentially flat. The more cyclical new home sales are projected to finish the year 18 percent below that of last year, and post a reduction in prices.

But there is good news: the market has essentially already bottomed. The pace of existing-home sales is expected to rise in the first quarter of 2007 -- on a seasonally adjusted basis -- from its current 6.2-million-unit pace to 6.3 million. Home prices, which have been falling since August, will follow this positive sales trend and begin to strengthen by the second quarter. By this time next year, sales will be higher by 5 percent, with home prices rising 2 percent. That is good news for real estate professionals. Business commission revenue, hence, can be expected to rise by 7 percent.

Watch for the "Uplifting Trend"
It is true that on a year-over-year basis – which is the preferred method of reporting by the media, particularly at the local level -- sales will continue to be negative well into the first half of 2007. In some hard-hit markets like Florida and Arizona, home sales have been compressed drastically in 2006. The constant reporting of 30 to 40 percent sales declines by local media has dissuaded many sideline home buyers from making an actual purchase. Fortunately though, that same compression means a lower base with which to compare in 2007.

By the late spring of 2007, the media will likely begin reporting positive “uplifting” trends. Statistical momentum says that will inevitably happen. Many potential buyers at that point will regain the confidence to enter the market. Some smarter buyers will see the herd of impending buyers over the horizon and will want to get a jump start.

The orderly decline and, in my view, the bottoming out of the housing market was helped immensely by the Federal Reserve. The Federal Open Market Committee ended its interest rate hikes and remained “neutral.” (The Fed funds rate had risen from one percent in mid-2004 to 5.25 percent in June 2006). With no further worries about further rate hikes, the bond market has paid more attention to job growth and inflation -- both of which have been weakening and thereby signaling that the economy is not overheating. The average 30-year mortgage rate has fallen from 6.8 percent in July to 6.1 percent in early December. Low rates in turn have begun to stimulate demand. Mortgage purchase applications were 11 percent higher in early December (as this is being written) compared to July on a seasonally adjusted basis.

Should the level of mortgage applications hold at this level, a similar rise in home sales will mean a home sales pace of 6.7 million existing home sales and 1.1 million new home sales. While some of those applications will not directly lead to a home sale (some would-be buyers will change their minds), the double-digit rise in mortgage applications is certainly a good news.

The stock market also is agreeing that the worst of the housing slowdown is over. Stock prices of the home-builder companies have been rising nicely since July. For example, Toll Brothers and Pulte Homes were trading at around $25 in July and in early December are at better than $30. Lennar, KB Homes and DR Horton have made equivalent gains.

Interestingly, builders themselves are partly responsible for bringing about a turnaround in their stock prices. Seeing a surge in inventory buildup, builders have been cutting back production sharply. Single-family starts in October were 32 percent below their level a year ago. And with the housing slowdown, the last thing the housing market needed was a prolonged oversupply condition that inevitably -- and unnecessarily -- depresses home prices for an equally prolonged period. Therefore, the sharp cutback in builder production is a healthy adjustment for the housing market.

Follow the Buck
One final piece of economic news: the fall in the dollar. This was somewhat overdue given that the United States has been running up a sizable trade deficit for quite some time. Sluggish U.S. economic growth, in combination with stronger-than-expected growth in European economies, was the apparent catalyst for the weakening dollar. U.S. properties are now trading at a larger discount (about 40 percent compared to five years ago) from a European perspective.

Furthermore, a strong price gain this year in the sunny Spanish resort areas will undoubtedly push German and British vacation home buyers to think about Florida and other sunny U.S. destinations as purchase locations.

So, we can all feel good that the year is over. Housing has weathered the storm, and down the road, it will be back to health.

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