Housing Boom May Be Coming Back to Earth

Don Hogsett, December 5, 2005

With the impact of higher interest rates finally sinking in on customers, the two biggest and most stable components of the broad U.S. housing market lost ground in October, signaling that a long run-up in housing may finally be at an end as the market stabilizes at more routine levels of growth.

Sales of existing homes, which make up almost 70 percent of the entire housing market, decreased 2.7 percent to a seasonally adjusted level of 7.1 million. And the most forward-looking indicator, housing starts, fell 5.6 percent to a seasonally adjusted level of 2.1 million units.

The only gainer was the highly volatile market for costly new homes, subject to wide swings from month to month, which roared ahead 13 percent, to a seasonally adjusted rate of 1.4 million units.

But even there results were mixed, with two regions of the nation putting up dramatic gains while the other two regions were up only slightly or down. New home sales accelerated 46.9 percent in western states and 43.3 percent in the Northeast. But sales in the South edged ahead 1.9 percent, and Midwest sales were down 9.5 percent.

“Housing activity has peaked and is coming down a bit, and we expect further cooling in the coming months,” said David Lereah, chief economist of the National Association of Realtors, a trade group for home sellers. “We feel confident that housing is landing softly as rates continue to rise.”

One effect of the cooling, said Lereah, is that markets are getting into better balance between demand and supply. “We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing,” he added.

The big gain in new home sales may have been triggered by consumers making a hurried effort to buy before rates climb, said David Seiders, chief economist of the National Association of Home Builders. “The great strength in new home sales was surprising. The up-shift in interest rates may have pushed a lot of fence-sitters into a buying mode, and builders may have deepened sales incentives to counter growing buyer resistance to home prices and interest rates.”

Housing By Region
Month-To-Month % Change

Source: U.S. Department of Commerce and National Association of Realtors
Northeast -7.4% -7.5% 43.3%
Midwest -1.9 -10.5 -9.5
South -1.8 -0.5 1.9
West -1.2 -10.8 46.9

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