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, says the latest forecast by the National Association of Realtors (NAR).


Lawrence Yun, NARs chief economist, says sales activity is expected to remain soft through the first half of the year despite the lowest mortgage interest rates in a generation.


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 says. 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, well see a faster and more meaningful recovery by expanding safe, affordable financing in high-cost areasthat, in turn, would help to stimulate overall economic activity.


NAR says its Pending Home Sales Index, a forward-looking indicator based on home sales contracts signed, slipped 1.5 percent to a reading of 85.9 in December, which was 24 percent below its December 2006 level of 113.3.


Were seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly, Yun says.


In the West, the index declined 3.1 percent in December to 83.9, which was 24 percent below December 2006. In the Midwest, the index rose 3.4 percent in December to 84.9, but that was 17.3 percent below a year ago. In the Northeast, the index slipped 1.7 percent to 68.9 and was 26 percent lower than December 2006. In the South, the index fell 3 percent in December to 96.4 and was 27 percent below a year ago.


Existing-home sales are projected at an annual pace of around 4.9 million homes in the first half of this year, rising notably to 5.8 million in the second half, and are expected to total 5.6 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, well generally see moderately higher home prices, Yun says.


Current housing conditions vary widely. Preliminary data show rising home prices in areas such as Rochester, N.Y.; Charleston, W.V.; Waterloo-Cedar Falls, Iowa; and Albuquerque, N.M.


New-home sales are likely to decline 17.7 percent to 637,000 homes in 2008 before rising 7.6 percent to 685,000 in 2009, the association says.


Builders will further lower new home construction throughout this year and into 2009 to bring inventory under control, Yun says. Housing starts, including multifamily units, are expected to fall about 20 percent to 1.08 million this year and decline another 1 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 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 overstretch to enter the market, Yun says. NARs housing affordability index is expected to rise to 129.0 in 2008 from 113.0 in 2007.


Growth in 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.


The National Association of Realtors claims to be Americas largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.


Its Pending Home Sales Index is based on pending sales of existing homes. A sale is listed as pending when a contract has been signed but the transaction has yet to close, though the sale usually is completed within one or two months of signing. The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.