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Housing Market expected to cool over next year


Rising mortgage rates and construction costs will cool the red-hot residential market and home prices could actually fall on the East and West coasts in the next 18 months, real estate experts told the fall meeting of the Urban Land Institute.
Prices on the coasts could see a "5 to 10 percent decline ... in the next year to year and a half," Narim Behravesh, chief global economist at Global Insight in Lexington, Mass., told gathering members of the global research and education institute.
But there is no bubble to burst in the middle of the country, he said.
The experts looked across the whole real estate spectrum.
Commercial real estate opportunities were seen as cresting, though they will still offer better yields than stocks or bonds.
Higher interest rates, possibly hitting 7 percent next year, won't hold down the price of new construction housing because of soaring material costs. And though there might be no bubble to burst in the Midwest, some were not particularly bullish on the region.
Nationwide, a cool-off in the market won't translate into a drop in the price of new construction homes. "Nationally, construction materials costs jumped 10.8 percent in the last 12 months, and they are projected to rise 5.2 percent in 2006," said John Ware, general manager of RS Means in Kingston, Mass.
Real estate's scorching performance may be on slowing down, but a report published by the Urban Land Institute and Pricewaterhouse Coopers maintained that it still will hold an edge over stocks and bonds -- at least in the near future.
"In the housing sector, there has been bubble talk, but we think it is a cycle," said Peter Korpacz, director of global strategies finance for PricewaterhouseCoopers. "As prices and interest rates go up, people will fall out of the market. There won't be a bubble unless there are job losses, and now the economy seems resilient.
"The hottest real estate market nationally is San Diego," Korpacz said. "In the future, the hottest markets to watch will (continue to) be coastal cities."
The survey said the Midwest suffers from loss of jobs and young people, industrial stagnation and uninviting climates.
"Chicago and Minneapolis are the best markets in the Midwest, but they lag because slow growth does not translate into investment interest," said Dean Schwanke, vice president of development trends and analysis for the institute.
Nationally, overbuilding seems likely in a number of markets, said Hessam Nadji, managing director of research services for Marcus & Millichap in Walnut Creek, Calif.
"Housing is definitely cooling off, but we will be shielded from a major turndown by new buyers in the market," Nadji said.
"The demand for housing will be bolstered by the 76 million baby boomers and 70 million echo boomers with rich parents."