Home Prices Seen Slowing

U.S. home prices will rise about 5% in 2006 -- far below the double-digit rates of the last five years -- as buyers back away because of rising interest rates and a clampdown by federal regulators on the riskiest home loans, a trade group said Tuesday.

The National Assn. of Realtors called its forecast of lower sales and more moderate price gains healthy and said the housing market would normalize this year.

“We don’t need to break a record every year for the housing market to be good,” said David Lereah, the group’s chief economist. “In fact, cooling sales are necessary for the long-term health of this vital sector.

“A modest slowdown in home sales, coupled with improvements in housing inventory, means the market is in the process of normalization. That will help to bring balance between home buyers and sellers, yet sales will remain historically strong,” Lereah said.

The U.S. housing market has begun to cool after five years of expansion that shattered sales and construction records and sent prices up more than 53% nationwide, according to government data.

As mortgage rates began to climb in September, the market started to show signs of softening. Fixed, 30-year mortgage rates should continue to climb in 2006, hitting 6.7% in the second half of the year, the Realtors said.

That, coupled with a campaign among U.S. regulators to push lenders to tighten their underwriting standards, especially on alternative and risky loans, should pull many investors out of the housing market this year, the group said.

The Federal Reserve and other regulators have increasingly warned about loose lending, and in December proposed guidance telling mortgage lenders they should take caution with innovative new mortgage products that may strain the finances of borrowers and banks as rates rise.

“A lot of demand has been met over the last five years, and a modest rise in mortgage interest rates is causing some market cooling,” Lereah said. “Along with regulatory tightening on nontraditional mortgages, there will be fewer investors in the market this year.”

The group said resales of existing homes should decline 4.4% to 6.79 million units in 2006 from an estimated record in 2005 of 7.10 million. Still, that projection would mark the second-strongest year on record.

Sales of new homes should fall 6% to 1.21 million units this year from 1.29 million in 2005, the Realtors estimated. That too would mark the second-strongest year for new-home sales.