No Magical Answers

And so it is with today's oracles, the economists that Americans turn to for modern-day answers.

"Obviously none of us really knows," conceded James Glassman, senior economist with JP Morgan Chase & Co., at a recent news conference at which he spoke along with David Seiders, chief economist at the National Association of Home Builders.

Generally speaking, Glassman, Seiders and other economists think the market will be good, though not as good as it has been in this record-breaking past year.

"Many of us are looking for some kind of a weakening process in 2006," Seiders said, projecting that interest rates on 30-year fixed-rate mortgages will rise to 6.75 percent next year, up from less than 6.3 percent now.

"It's reasonable to assume that real estate appreciation will slow quite significantly in the coming year; I wouldn't be surprised by single-digit [appreciation] rates of 5 percent to 8 percent," said Glassman.

Of course, these prognostications should be taken with a dose of skepticism. A year ago, for example, several prominent industry economists underestimated the strength of the 2005 market, according to a report by Inman News, a real estate news service. David Lereah, chief economist of the National Association of Realtors, for example, thought that 6.38 million existing homes would be sold; 7.11 million were actually sold. Douglas Duncan, chief economist for the Mortgage Bankers Association, thought that the national median price would climb to $190,300; it actually rose to $229,000. And Seiders thought interest rates on 30-year fixed-rate mortgages would rise to 6.5 percent, but they reached an average of just 5.8 percent.

It's always hard to gauge the market. Among the uncertainties that affect forecasts are job and economic growth, the employment rate and interest rates. Then there's housing affordability, seasonal home-purchase patterns, household net worth, pay rates, productivity gains and prospects for inflation.

This year, several other factors are complicating the forecast process, including unexpectedly high energy prices, the aftermath of Hurricane Katrina and the growth of nontraditional loans.

These loans are different from the standard 30-year, fixed-rate models that historically have made up the bulk of the U.S. loan market. In January 1990, fewer than 2 percent of borrowers took out adjustable-rate loans, but at the end of 2005, a third of new mortgages were adjustable. With interest rates rising, many borrowers' mortgage payments are likely to leap at some point in the next few years. Some borrowers will be hit hard, according to a recent report by Friedman, Billings, Ramsey & Co., which found that average annual mortgage payments for some borrowers could rise by 11 to 27 percent. If adjustable-rate mortgages come to be seen as unattractive, and fixed-rate mortgages become too costly as interest rates rise, fewer people will buy houses. Demand will fall.

The Friedman economists also examined the potential impact of higher energy prices on borrowers, particularly those with adjustable-rate mortgages, asking whether homeowners will have the financial wherewithal to handle both higher energy prices and higher mortgage payments. Since June 2004, gasoline prices have climbed 18.1 percent, natural gas rose 15.2 percent and heating oil rose 49.7 percent, the study noted.

Furthermore, natural gas prices may increase 48 percent or more this winter, according to the Energy Department's Energy Information Administration.

The Friedman economists concluded that people will be able to manage hikes on both fronts, possibly by taking in roommates or cutting their discretionary spending -- both life choices that could make homeownership less attractive.