It seemed like a painful defeat when the National Association of Realtors issued its projection last week that home sales would be lower than previously thought, but Chief Economist David Lereah worried months ago that housing would be in trouble if short-term interests rates were taken higher by the Federal Reserve. Luckily for housing, the FED decided to pause at 5.25 percent, but it may have been too little, too late, as Lereah feared.

Whether it was the unseasonable heat across the nation or the desire to see home prices fall along with interest rates, buyers stayed home in droves.

“A year ago we had record home sales and tight supply with buyers bidding over the asking price,” said Lereah in a prepared statement. “This year sales are slowing, homes are plentiful and sellers are negotiating. Under these conditions, we’ll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory.”

That's significant because housing has never receded on a national scale since the NAR began keeping records back in 1968. However, let's have a little perspective. There's also not been a period of double-digit appreciation on a national scale lasting a record five years, either. In that case, some pullback in prices should be expected as buyers realize they no longer have to compete at the top of their respective markets.

“This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms,” Lereah said. “Keep in mind that over time, home prices rise at the rate of inflation plus one-to-two percentage points -- buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned.”

The national median existing-home price for all housing types is expected to grow 2.8 percent this year to $225,900, with the median new-home price rising only 0.2 percent to $241,400. New-home appreciation is dampened by builders offering incentives to reduce inventory.

Existing-home sales are forecast to fall 7.6 percent to 6.54 million in 2006, the third best year after consecutive records in 2004 and 2005. New-home sales should to drop 16.1 percent this year to 1.08 million, the fourth highest on record. Housing starts are projected to decline 9.6 percent to 1.87 million in 2006.

What the big unknown is -- how long will buyers sit on the sidelines? Interest rates are as low as they were back in March 2006, and likely to go lower. Home price appreciation has slowed considerably, but is still appreciating well over the rate of inflation in many areas as opportunities and jobs shift sectors. For example, energy-strong areas such as Houston are seeing record housing sales, as reported this summer.

"This is a geographic contraction," says Lereah. "California will take the longest to correct. It could be another 12 months. Southern Florida could be another 12 months -- but I doubt it. If sellers reduce prices, sales will come back. This is not a contraction due to a poor economy and lost jobs. Households and investors have the financial wherewithal to purchase property- but they have lost confidence and need prices to correct to come back into the market. Inventories will begin to decline by the end of the year and sales will flatten out."

Noting that the news wasn't bad across the board, NAR President Thomas M. Stevens from Vienna, Va., said higher interest rates slowed home sales during the first half of the year. “The slowdown occurred mostly in higher cost markets, while other areas continued to expand,” said Stevens, senior vice president of NRT Inc. “The shift we’ve seen lately results from psychological factors with buyers on the sidelines trying to time the market. Both buyers and sellers need to understand what’s going on within their local market areas, so it’s even more important now to work with a professional who can guide you through current changes and the negotiation process.”

Others are more accusatory. Publicly held builders have seen their stock values deteriorate as homebuying slowed and some contracts were canceled. Hovnanian Chief Executive Ara Hovnanian blames the media. "A steady diet of negative press on the declining housing market has kept a large number of potential buyers on the sidelines," he said in an analysts' conference call, noting that homebuilders have been surprised by the speed and breadth of the new housing market slowdown.

In many areas, homesellers are sticking to their prices creating a stand-off with buyers who are waiting for prices to drop. Many may decide to make a move while mortgage interest rates are still favorable.

“Mortgage rates are one of the bright spots in the economy right now, with an unexpected decline recently in the 30-year fixed rate to a narrow range around six-and-a-half percent,” Lereah said. “This should encourage some of the nearly 4 million people who’ve found newly created jobs over the last two years.”

Unemployment figures remain low, expected to average 4.8 percent for 2006, while annual inflation, as measured by the Consumer Price Index, is forecast at 3.5 percent. Growth in the U.S. gross domestic product should be 3.4 percent this year. Inflation-adjusted disposable personal income is projected to grow 3.5 percent in 2006.

If housing prices come in at above inflation, they will sustain historical norms. If they don't, it will be the first time in decades that inflation has outpaced housing. The national median existing-home price for all housing types is expected to grow 2.8 percent this year to $225,900, with the median new-home price rising only 0.2 percent to $241,400.

Existing-home sales are forecast to fall 7.6 percent to 6.54 million in 2006, the third best year after consecutive records in 2004 and 2005. New-home sales should drop 16.1 percent this year to 1.08 million, the fourth highest on record. Housing starts are projected to decline 9.6 percent to 1.87 million in 2006.

"We will hit bottom with sales volume next month," says Lereah. "I expect price declines for August, September, and October. The worst is over on the sales and inventory side. Those measures will begin to improve by the end of the year. Prices however will turn negative. We should be done by end of first quarter of next year. The aftermath? A sluggish housing market until 2008."

Published: September 11, 2006

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.