MarketWatch

CHICAGO – Although no one expected it a year ago, the U.S. housing sector is on the brink of another milestone year in 2005, its fifth straight record for home sales.

That’s been great news for home sellers, who in most parts of the country have been collecting on sky-high asking prices. And it hasn’t been all that bad for home buyers, who despite all the predictions to the contrary reaped major benefits as mortgage rates this summer once again fell near 40-year lows.

Although most of the evidence at this point is anecdotal, housing does appear to have cooled off late in the year as 30-year mortgage rates moved back above 6 percent and houses, especially the most expensive homes, started to linger on the market.

“Two things every American knows: the price at the gas pump and their house story. We all sense there is a shift in the market … from a seller’s market to a buyer’s market. We’ll see more in the data in the coming months that will confirm what we all know,” said James Glassman, senior economist with J.P. Morgan Chase.

As the market comes into better balance in 2006, home sales will taper off from their record pace, dropping anywhere from 5 percent to 10 percent, according to a forecast from mortgage agency Fannie Mae. And those double-digit home-price increases will shrink markedly, averaging only 6 percent or so next year, the National Association of Home Builders predicts.

Housing is beginning a “systematic simmering-down process” from its recent boil, said David Seiders, chief economist with the National Association of Home Builders. “My judgment is still that while the housing market has been strong, we are toying around with a peak or slightly past it.”

Even though housing starts rebounded 5.3 percent in November to a seasonally adjusted annual rate of 2.123 million units, Seiders said home-builder confidence is well off its highest levels of the year and some residential builders have started rolling out incentives, such as free upgrades, to keep sales moving.

“The demand side has tapered off to some degree, and there has been an obvious deterioration of affordability,” he said. “Higher energy costs are also giving some buyers pause.”

The NAHB forecast calls for home-price gains to ease, dropping from 11 percent this year to 6.5 percent in 2006 and 4.4 percent in 2007. “We’re certainly seeing a record rate of return in real terms (after factoring out inflation), and there has been very little sign of deceleration,” Seiders said. “But it is probably inevitable that some of this will slow down.”

One of the major factors limiting price gains in the year ahead will be a withdrawal of some of the investor and speculative demand for housing, he said. Rising interest rates and tightened scrutiny on short-term, exotic mortgages such as the pay-option adjustable-rate mortgage will curtail that demand, he said.

Don’t, however, think that housing is going down the tubes.

Glassman agreed that home-price gains overall will moderate, and said some markets – notably those in southern Florida, the New York area and much of California – could see real estate performance that is weaker than the national numbers.

But Glassman said the overall economy remains in good shape, and that will mitigate any downturn in housing. “It looks like a pretty good, if not booming, backdrop for housing,” he said.

In fact, David Lereah, chief economist for the National Association of Realtors, said even with projected declines, 2006 should be the second-best year ever for home sales.

Existing-home sales, expected to rise 4.7 percent to 7.1 million this year, are likely to decline 3.7 percent in 2006 to 6.84 million, according to the NAR forecast, which is not as pessimistic as Fannie Mae’s outlook. New-home sales, projected to increase 7 percent to 1.29 million in 2005, are forecast to drop 4.8 percent to 1.23 million next year – that would also be the second best on record.

“Home sales are coming down from the mountain peak, but they will level out at a high plateau – a plateau that is higher than previous peaks in the housing cycle,” Lereah said. “This transition to a more normal and balanced market is a good thing.”

Buyers will find the most relief. As home-price gains moderate and sellers face longer market times, buyers will have more time to choose among listings and be able to negotiate better deals when they do. Although mortgage rates will be higher, perhaps reaching 6 3/4 percent be the end of 2006, they will still be low by historical standards.

Sellers who set unrealistic asking prices are likely to see houses languish if they don’t bring their expectations down, real estate agents say. Multiple offers and bidding wars will disappear in all but the hottest markets, and sellers will need to have homes on the market in tip-top shape to bring top dollar.