Behind rosy home data, signs of worry

The nation's housing market is probably the most robust part of the US economy. New homes are going up as fast as carpenters can load their nail guns. And with long-term interest rates still low, Americans are continuing to snap up existing homes, driving prices higher and higher.

But as summer ends, economists are also seeing signs that the nation's huge rush to buy housing is finally starting to slow. Indications include a two-year high in unsold homes, falling prices for new homes, and a continued decline in the affordability of housing.

"The housing market is resilient, still going strong, but it would be a mistake to ignore the weakness in existing sales and assume everything is copacetic," says Anthony Chan, an economist at JPMorgan Asset Management in Columbus, Ohio.

Wednesday, the news illustrated the changes taking place. The Commerce Department reported that July sales of new homes rose by 6.5 percent to a record 1.41 million annual rate. This was higher than Wall Street economists had expected. However, new-home prices dropped to $203,800, down 4 percent from last July. In fact, this is the lowest new-house price reading since December 2003.

"The new-home sales market is the canary in the coal mine," says Mr. Chan. "Builders have a better clue as to what the right price is to move a house."

The report on new homes follows one on Tuesday that existing-home sales dropped 2.6 percent from a record high in June. Within that report was news that the inventory of unsold houses rose to 2.75 million, which represents a 4.6-month supply at the current sales pace. This is up from 4.4 months the prior month. The level is still considered "a tight market," says Lawrence Yun, a senior economist at the National Association of Realtors in Washington. But he points out that the inventory level is up 13 percent from a year ago. "Certainly more people are in a sense trying to sell or realize capital gains," says Mr. Yun.

Even with the changes in the market, many economists remain optimistic that the housing market is not a bubble waiting to burst. "We may see a flattening of the increase, but not much of a drop," says Bob Walters, chief economist at Quicken Loans in Detroit. "The fundamentals remain strong: Employment is robust, and interest rates remain low."

Some economists had expected the housing market to slow as the Federal Reserve raised interest rates and energy prices continued to sap consumers' pocketbooks. So far, though, that is not happening, says Kathleen Camilli of Camilli Economics LLC in New York. "The slowdown has been postponed until 2006," she says.

Nevertheless, affordability continues to be a dark cloud for housing. For example, in San Francisco, the median price for a house is now $726,900. In Orange County, Calif., it is $696,100.

On a regional basis, July sales of existing homes dragged in almost every area. They fell 1.8 percent in the Midwest, 3.3 percent in the Northeast, and 7.5 percent in the West. The South was unchanged.

But compared with a year ago, they were anywhere from 2.5 to 6.3 percent higher. In every region, the median price rose at double-digit rates, except in the South, where it was up 7.5 percent.

Although existing homes in the South may be slowing, there is no sign of a pause in the Florida new-home market, says Alan Levan, CEO of Levitt Corp., a home builder based in Fort Lauderdale. Mr. Levan says that both prices and demand have remained strong, particularly in the condo market.

Levitt itself is experiencing the surge: When it recently announced the sale of 500 new homes in its "Tradition" community in Port St. Lucie, 10,000 people showed up. "There is no sign of a slowdown that we can see," says Mr. Levan. "All our sales centers are very busy."

Another hot spot, Arizona, also continues to thrive. Last week, Starpointe Communities, the state's largest condo developer, sold out in four days the first phase of a 312-unit condo in North Phoenix. In June, more than 3,000 people had enrolled in a lottery to determine who would buy the units. "The affordability index remains strong in Arizona," says Robert Lyles, a partner. "Plus, we have a growing jobs base and population."

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