The sales rate of 6.97 million units is still solid, however, and remains well above the previously lofty 6.72 million rate of 2004 and 6.11 million in 2003. Indeed, since reaching the “6 handle,” economists have viewed the existing home sales rate as unsustainable, so it will be interesting to see how these figures behave when we enter the seasonally important second-quarter period of 2006.

The rise in the month’s supply in November suggests a weaker path in 2006 than in the prior three years. But all of the housing data are generally trending higher at a rapid clip in this expansion, and this makes the larger inventory figure for the sector hard to interpret.

TURN SIGNAL?  Also, prices have exhibited virtually none of the seasonal weakness typical for each fourth-quarter period for these nonseasonally adjusted data from the National Association of Realtors. Existing home sales prices have historically revealed a fairly consistent seasonal pattern of fourth-quarter declines at a 6% rate. But this year, we’re seeing an atypically small fourth-quarter decline at only a 2% rate, which is in stark contrast with market fears that a correction in housing prices is under way.

Real estate activity is showing a seasonal slowdown that’s being viewed by some as a signal of a turn, with all the usual characteristics of falling prices, reduced transactions volume, and multiple bid situations, etc. However, because of the strong seasonal patterns usually seen in these metrics of housing-market performance, there’s actually little evidence in reported data after adjustment for seasonal variation of an atypical adjustment in the sector.

If we look at the long-term price patterns for the existing home sales report, price gains for homes in the Northeast and West have been historically large, but not unprecedented. Prior boom periods have extended well beyond the emergence of public perception that prices in these markets are “too high.”

ONGOING CYCLE.  Though such an assessment is likely correct for some urban markets, calling the top for the national market as a whole won’t be easy until we see signs that seasonally adjusted price declines are actually emerging. Any pop in the bubble may not occur until late 2006, or even 2007, depending on the course for Fed policy and market interest rates.

Overall, most market economists entered 2005 (and 2004 and 2003…and 2002…) expecting a drop in housing activity for the year, given the enormous “overshoot” of activity through the recession. But the sector keeps setting new highs, and the sequence may well be emerging again in 2006.

We do expect 2005 to mark the peak in the housing sector, as we expect some moderation in the new year. But as with prior years, when we bucked the trend and projected outright increases for the sector, the 2006 jury is out on where demand and supply will meet in the new year until we enter the seasonally important spring housing market.