A continuation of soft market conditions is forecast for existing-home sales in the months ahead, with improvement expected by the second half of this year if loan limits are increased, according to the latest forecast by the National Association of Realtors(R).

Lawrence Yun, NAR chief economist, said sales activity is expected to remain soft through the first half of the year despite a generational low in mortgage interest rates. "Household formation was only half of what it should have been last year given the demographics of a growing population and sustained job growth, so there clearly is a pent-up demand from buyers who are on the sidelines," he said. "Existing-home sales have moved narrowly since last September, but when the full impact of higher loan limits for conventional mortgages begins to impact the market there is likely to be a notable rise in home sales and prices. If higher limits are enacted very quickly, we'll see a faster and more meaningful recovery by expanding safe, affordable financing in high-cost areas - that, in turn,
would help to stimulate overall economic activity."

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, slipped 1.5 percent to a reading of 85.9 from a downwardly revised index of 87.2 in November, and was 24.2 percent below the December 2006 level of 113.3. "We're seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly," Yun said.

The PHSI in the Midwest rose 3.4 percent in December to 84.9 but is 17.3 percent below a year ago. In the Northeast, the index slipped 1.7 percent to 68.9 and is 26.0 percent lower than December 2006. The index in the South fell 3.0 percent in December to 96.4 and is 27.0 percent below a year ago. In the West, the index declined 3.1 percent in December to 83.9 and is 24.1 percent below December 2006.

Existing-home sales are projected at an annual pace of around 4.9 million in the first half of this year, rising notably to 5.8 million in the second half, and totaling 5.60 million for all of 2009. The aggregate existing-home price should decline 1.2 percent in 2008 to a median of $216,300, and then rise 3.2 percent to $223,200 in 2009.

"Areas with a high prevalence of subprime lending will continue to feel downward price pressure. Where builders have cut construction sharply, and in most areas with improving affordability conditions, we'll generally see moderately higher home prices," Yun said.

Current housing conditions vary widely. Preliminary data shows rising home prices in areas such as Rochester, N.Y.; Charleston, W.V.; Waterloo-Cedar Falls, Iowa; and Albuquerque, N.M. Fourth quarter metro area median existing-home prices, showing changes in approximately 150 markets, will be released February 14.

New-home sales are likely to decline 17.7 percent to 637,000 in 2008 before rising 7.6 percent to 685,000 in 2009. "Builders will further lower new home construction throughout this year and into 2009 to bring inventory under control," Yun said. Housing starts, including multifamily units, are estimated to fall 20.1 percent to 1.08 million this year, and decline another 1.3 percent to 1.07 million in 2009. The median new-home price is expected to fall 4.3 percent to $236,300 in 2008, and then increase 5.0 percent in 2009.

The 30-year fixed-rate mortgage is forecast to rise slowly to the 5.9 percent range in the fourth quarter, and then average 6.3 percent in 2009. "Affordability conditions are anticipated to rise 14.2 percent this year, permitting more people to become homeowners, but buyers should avoid aggressive lenders and not over-stretch to enter the market," Yun said. NAR's housing affordability index is expected to rise from 113.0 in 2007 to 129.0 in 2008.

Growth in the U.S. gross domestic product (GDP) is projected at 2.2 percent in 2008 and 2.7 percent in 2009. The unemployment rate should rise to 5.4 percent in the second half of 2008 before averaging 5.2 percent in 2009. Inflation, as measured by the Consumer Price Index, is seen at 2.7 percent this year and 1.4 percent in 2009. Inflation-adjusted disposable personal income is likely to grow 1.7 percent in 2008 and 3.5 percent next year.