RISMEDIA, November 21, 2006— (WSJ Online)—The worst of the housing bust is over, economists said by nearly 2-to-1 in the latest WSJ.com economic forecasting survey. But they still predict that the average selling price of a house will fall next year.

Charts and Full Results

See and download forecasts for growth, holiday sales, inflation and employment. Plus, views on the housing sector, the top priorities of Congress, and more. Survey conducted Nov. 13-15.

After several years of double-digit percentage increase, housing prices stopped soaring this year. The 49 economists responding to the WSJ.com forecasting survey expect home prices, measured by the government’s Office of Federal Housing Enterprise Oversight index, to rise 2.8% this year and to fall by 0.5% next year. That contrasts with a 13.4% increase in 2005.

“We’re nearing the end of the slowdown for most markets,” said Ethan S. Harris at Lehman Brothers. Prices still have some ways to fall before they’ll stabilize, but there are signs that most drastic parts of the downturn – marked by a sharp pullback in demand and new construction – have run their course.

The economists’ predictions for home prices next year vary widely, from an increase of 7%, predicted by Kurt Karl and Arun Raha of Swiss Re, to a 10% decline, expected by Maury Harris of UBS. Mr. Harris, for his part, said he expects a large inventory of vacant newly constructed homes to push prices lower in the first half. Construction companies “built much more than were justified because of investor interest,” he said.

While 20 economists predicted home prices would rise next year, 24 forecast a decline. Just eight of the economists forecast gains greater than 2.1%, which is their average forecast for consumer-price inflation through mid-2007. The Ofheo index, which is closely watched by economists, has never posted a year-to-year decline.

Richard DeKaser, an economist at National City Corp., a big mortgage provider, said he thinks the worst is over. “We’re starting to see inventories topping out and possible declining,” he said. Mr. DeKaser forecast a 4.4% increase in prices this year and a 1.8% decline next.

The housing market, of course, doesn’t move uniformly across the country; some regions or individual cities often have price changes decidedly above or below the national average.

Mr. Harris of Lehman expects price declines next year to be confined to “bubble” markets, such as those in Florida, California and cities in Nevada and Arizona, where large numbers of investors have artificially inflated prices. “There’s no reason for prices to be falling in areas without a bubble,” he said. “People are just slowing down purchase decisions.”

Allen Sinai, at Decision Economics Inc., believes the worst of the bust is over, but he feels housing remains a big risk to the economy. The housing sector subtracted 1.1 percentage points from third-quarter gross domestic product, according to preliminary numbers from the U.S. Commerce Department.

About the Survey

The Wall Street Journal surveys a group of more than 50 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the monthly survey for November. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

The economists trimmed their forecasts for fourth-quarter economic growth: Their average estimate puts gross domestic product growth at a 2.3% rate in the fourth quarter, down from the 2.5% rate they forecast in the October survey. They expect growth to remain at that rate through the first half of 2007 and then to accelerate later in the year. On average, the economists predicted growth of 2.8% during the second half 2007. GDP is the broadest measure of economic output.

The housing slowdown is expected to hit consumer spending, but the “consumer won’t cave in and drive us into a recession,” said Mr. Sinai. Steady interest rates, controlled inflation, stabilizing energy prices and a solid jobs market will support the economy, he said.

Indeed, new data released Monday indicated that weakness in the housing sector is being offset by other areas of the economy. The Conference Board, an industry-backed research group based in New York, said its composite index of leading indicators for October rose by 0.2% to 138.3, in line with expectations. September’s reading was revised up to a 0.4% advance. The index is designed to predict activity in the three to six months ahead.

“People say all bubbles end in disaster, but this is a small bubble. Home prices are just about 20% too high. We need to take it seriously, but in the history of bubbles, this will go down as one of the smaller ones,” said Lehman’s Mr. Harris.

Among other findings in the survey:
• Economists expect a relatively happy holiday for retailers, forecasting a 5.1% rise in sales from last year.

• Some 57% expect Fed policy to be the biggest factor in the economy and markets over the next year, topping Iraq or the budget and tax legislation.

• Eight of 56 economists expect the Federal Reserve to raise rates beyond the current 5.25% rate before June 2007.

• Economists expect just 107,000 new jobs a month over the next year, down from 109,800 forecast in October and 179,400 at the high for this year’s surveys, in February.

For more information, write to Phil Izzo at philip.izzo@wsj.com

RISMedia welcomes your questions and comments. Send your e-mail to: realestatemagazinefeedback@rismedia.com.