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Dec. 29 (Bloomberg)—Sales of existing homes fell to an eight-month low in November, leaving the number of houses on the market at the highest since 1986 and suggesting one pillar of the U.S. economy will weaken next year.

Home sales dropped 1.7 percent to a 6.97 million annual rate, the National Association of Realtors said today in Washington. Mortgage rates are higher than a year ago and today’s report showed the median price rose 13.2 percent since November 2004 to $215,000, making homes less affordable.

The housing slowdown means the world’s largest economy may have to depend more on businesses and less on the consumer next year. Chicago-area manufacturing held above the year’s average this month and orders increased, a purchasing managers survey showed today. Companies are confident enough to keep hiring, the latest initial jobless claims report suggested today.

The cooling U.S. housing sector should apply a dampener to consumer spending as 2005-2006 unfolds, but some of this could be offset by still-decent job growth,'' Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto, said in a report.Business spending is starting to take the economic growth baton from consumers.’’

The National Association of Purchasing Management-Chicago said its Business Barometer fell to 61.5 from 61.7 in November, remaining above its average 60.7 for the year. A figure higher than 50 signals growth. A gauge of prices paid by manufacturers fell from a 26-year high.

The number of Americans filing first-time claims for unemployment benefits rose 3,000 to 322,000 last week, staying below the year’s average and suggesting the job market is still growing, today’s Labor Department report showed. The four-week moving average, a less volatile measure, rose by 250 to 325,000.

Home Sales

The housing industry accounts for only about 5 percent of the U.S. economy and yet generated half of the growth in this year’s first six months and more than half of the private jobs added since 2001, Merrill Lynch & Co. said in an August report. Price appreciation helped add $5.2 trillion to Americans’ balance sheets during the current expansion, or 68 percent of all wealth creation, according to the Federal Reserve.

The benchmark 10-year note’s yield was little changed at 4.38 percent as of 10:35 a.m. in New York. The two-year note also yielded 4.38 percent, resulting in a so-called flat yield curve that may reflect potential for the economy to slow.

Housing has certainly been an important driver of economic growth,'' said Carl Riccadonna, an economist at Deutsche Bank in New York.Nonetheless, we are looking for a solid 2006 with business spending to pick up the slack.’’

Housing Has `Peaked’

Existing-home purchases, which account for about 85 percent of the residential real estate market, slowed in all four regions and are down from a record 7.35 million pace in June. New-home sales fell 11 percent in November, the most in 11 years, the Commerce Department said Dec. 23

``Housing activity has peaked,’’ said David Lereah, chief economist at the Realtors group, which predicts sales of previously owned homes will fall to 6.84 million in 2006 from a projected record 7.1 million this year.

Economists expected November sales to fall to a 7 million annual rate from 7.09 million in October, based on the median forecast in a Bloomberg News survey. November’s reading was the lowest since 6.87 million in March.

The supply of existing homes for sale, another measure of housing demand, increased to 2.903 million in November, the highest since 1986. That represented 5 months’ worth of sales at the current pace, up from 4.9 months in October. Last week’s Commerce Department report also showed a record number of new homes left on the market.

Home Prices

The rate of price appreciation probably will slow next year, economists and industry executives said. Housing affordability was at a 14-year low in the third quarter, according to the Realtors’ group.

Our price increases are moderating some from what they were in the past,'' Donald Tomnitz, chief executive officer of D.R. Horton Inc., said in an interview Dec. 12.But we think that’s a good thing.’’

The average price on a D.R. Horton home climbed 8.6 percent in its fiscal fourth quarter to $261,405 and sales rose 38 percent to 18,622 units. D.R. Horton is the largest U.S. homebuilder.

Resales of single-family homes fell 1.9 percent to a 6.11 million annual pace in November. Sales of condos and co-ops dropped 0.8 percent to a 857,000 rate.

Existing home sales are counted when a contract is closed and reflect buying decisions made a month or two earlier. New- home sales are tabulated at the time a contract is first signed.

Mortgage Rates

Rising interest rates are contributing to the slowdown.

The average rate on a 30-year fixed mortgage was 6.33 percent in November, up from 6.07 percent the month before and the highest monthly average since July 2002, according to Freddie Mac. The rate has stayed above 6 percent since July.

The Fed on Dec. 13 raised its benchmark lending rate for a 13th consecutive time, to 4.25 percent, to slow inflation. Economists surveyed by Bloomberg forecast the Fed will raise rates by a quarter percentage point in the first quarter.

The Realtors group’s index of pending home resales fell 3.2 percent in October. The gauge, reported in Dec. 6, may be more current than existing home sales because it measures transactions at the time the purchase agreement is signed.

Home resales declined in all four regions during November, today’s report showed. They dropped 3.7 percent in the West to 1.85 million; 2.7 percent in the Northeast to 1.09 million; 1.3 percent in the Midwest to 1.56 million; and 0.7 percent in the South to 2.74 million.

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Want to turn some heads at your next cocktail party? Tell people that buying real estate in Texas is a better bet in the short term than investing in California. It might sound bizarre, but it’s what some real estate gurus are telling their investors.

To get a feel for which real estate markets were hot in 2005 and in previous years, you could practically throw darts at maps of California and Florida to find winners. Arizona and other Sun Belt areas didn’t perform too shabbily either.

But the question on many wise real estate industry minds is whether these states can keep up their torrid pace of sales and price gains.

One belief out there is that pricing is peaking in these markets, partly because speculators (who bought houses solely as investments and provided artificial demand in recent years) are starting to exit. Thus, there might not be too much to gain by buying a home in such states, at least for the short term.

Experts suggest that areas like Texas and the Carolinas could be next year’s winners. As for next year’s stinkers, they’ll likely be in areas that rely heavily on manufacturing, such as Detroit, Cleveland, Buffalo, and Rochester, N.Y.

Phoenix recently took the nod as the nation’s hottest housing market, with prices rising 34% year over year for the quarter ending Sept. 30, according to the statistics from the Office of Federal Housing Enterprise Oversight. Next up were two neighboring southwest Florida coastal communities—Cape Coral-Fort Myers, which saw prices jump 33%, and Naples, with a rise of 32%.

Besides newfound retirement destinations—like St. George, Utah, Coeur d’Alene, Idaho, and yet another Arizona market, Prescott—the remainder of the top 20 price-gainers this past year were cities in Florida and California. This growth shows how coastal areas with warm climates continue to see much demand.

“The hot markets are still hot,” says Philip Hopkins, managing director of U.S. regional services with Global Insight, an economic research firm. “We’re seeing some slowing in the rate of price growth, and in some cases price declines outside of the hot housing markets. A soft landing of housing prices is starting to show up outside the hot housing markets. The question is, when does it show up in the hot housing markets?”

Global Insight and financial services concern National City put out a report each quarter on which markets they consider the most overvalued in terms of price. Naples, Fla., recently took the nod as the nation’s most overvalued market. However, from the second quarter to the third quarter of this year, the bulk of the overvalued markets remained the same, with only Phoenix, Honolulu, Pensacola, Fla., and Orlando, Fla., being added to the list. Hopkins says this steadiness shows how pricing is holding up in overheated markets.

He predicts it will take another quarter or two to see any meaningful price changes in a place like Naples, where demand remains strong.

Bet on Boomers in the Carolinas
The huge run-up in prices in Florida has baby boomers looking for cheaper retirement destinations. Some watchers point to the Carolinas as providing some value. “Things are getting very expensive in Florida, so people who had planned to move to Florida have been priced out and are looking for alternative retirement destinations,” says Lawrence Yun, senior economist with the National Association of Realtors.

He notes that Charleston, S.C., Myrtle Beach S.C., and Wilmington, N.C., are attractive alternatives. All are areas that are near the ocean and where more retirement services are being offered.

But even those areas are getting expensive. Wilmington prices rose 17% last year. “You don’t have bargains on the beach anymore,” says Connie Majure-Rhett, CEO of the Wilmington Chamber of Commerce. She admits, though, that some beach houses might look like bargains compared with Miami or California.

Some neighboring areas near Wilmington might still offer some deals, Majure-Rhett says, noting pockets of Tender and Brunswick counties. One thing she often hears from newcomers moving to Wilmington is that they first moved to Miami from the north but missed the seasons. Retirees from the Northeast also like Wilmington because it is closer to the children and grandchildren they left behind, she says.

Even though Myrtle Beach prices have jumped recently (up 16% in the past year) the area, like Wilmington, still offers some value relative to Florida. While Naples’ prices rose 119% over the past five years, Myrtle Beach prices rose 44% in the same period, and Wilmington’s rose 45%.

“The average Joe can come in here and buy a condo on the ocean, ranging from $120,000 to $400,000 and up,” says Dean Spencer, broker-owner of Re/Max Town & Country in Myrtle Beach. Areas farther away from the ocean are much cheaper, and older single-family homes can be found for $200,000 to $300,000, he says. Centex Homes (CTX:NYSE – news – research – Cramer’s Take) has been an active builder of new town homes and single-family homes in the area.

Charleston, with its historic city and nearby beaches, is also considered a value. The Global Insight/National City study recently said the market was undervalued by 7%. But prices rose 15% in the past year and 51% in the past five years.

Mess With Texas
To find some real value, you might need to head to Texas. “The markets that have not gone up much, that have been flat for the past three to four years, probably have the biggest potential. The biggest market that fits that category is Texas,” says John Schaub, author of Building Wealth One House at a Time.

Texas has a notoriously fickle housing market because of its penchant for overbuilding. In Houston, Dallas, Fort Worth, and San Antonio, real house prices (adjusted for inflation) have actually declined since 1980, according to a recent report entitled “Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions” by an economist at the Federal Reserve Bank of New York and professors at Columbia Business School and the Wharton School of the University of Pennsylvania.

Schaub says California is a better long-term investment, but for short-term gains, Texas might be of interest. For investing in homes for rental income, rather than price appreciation alone, Texas properties can offer cash flows of 6% to 7%, which are hard to be matched elsewhere, Schaub says.

Cities like Houston are benefiting from the strong price of oil, which is fueling job growth, and areas like Austin are benefiting from the resurging technology industry.

“I’ve been advising people to go into Texas for some time,” says Robert Campbell, author of Timing the Real Estate Market. Campbell also believes the market is undervalued and that oil prices will only rise higher, which will benefit the state’s economy as a whole.

Major public homebuilders are already reaping the benefits of their Texas bets. In its third-quarter conference call, Pulte Homes (PHM:NYSE – news – research – Cramer’s Take) said its new orders were strongest in Texas, particularly in San Antonio and Austin. Pulte’s Central region, which includes Texas, provided the best order growth in the country for the company, jumping 44% for the quarter over last year.

Deep Value
If hyping up Texas or the Carolinas at your next cocktail party doesn’t turn enough heads, try talking about the valuable working-class housing sitting in unsexy markets like Baltimore, Philadelphia and New Haven, Conn.

Investing in such properties is a strategy employed by Tom Skinner, managing partner of Redbrick Partners LP, who is a proponent of cash flow. His New York real estate firm has a series of private funds that invest in single-family properties in markets where price appreciation hasn’t been spectacular but rents have been steady.

“The vulnerability is in markets where there is not significant cash flow,” Skinner says. He admits that some of the best price-performing markets in the country—like southern Florida, parts of California, Las Vegas, and Phoenix—might continue some price momentum into 2006, but eventually price growth will slow in later 2006 going into 2007, he says.

That’s why Skinner is currently eyeing areas of upstate New York, like Syracuse, which provide steady rental streams but where housing prices rose just 7% last year. He’s also considering areas of Ohio, such as Columbus and Dayton, which he admits won’t see much price appreciation over the next year but look nice on a yield basis for a five-year investment. He also has his eyes set on Dallas.

It might be wise to pay attention to Skinner. Institutional investors already have. His funds have returned 16% to 18% annually since their inception in 2002, he says.

As for the red-hot areas like Florida and California, Skinner sounds like a traditional economist (which he is by training). “At some point, the music stops,” he says.

So, what do real-estate people think about the suggestion recently made by James Hughes that people not buy a house now—unless they are planning to live in the place for 10 years?

Hughes, a real-estate expert, is dean of the Bloustein School of Policy and Public Planning at Rutgers and believes that house prices are very high.

“You should always look for the long term,” said Colby Sambrotto, chief operating officer of ForSalebyOwner.com, the leading nationwide broker that charges fees, not commissions.

“Market-timing is hard to do. Besides, every time experts have said that you’re buying at a peak, prices have continued going up.”

Sambrotto, who works out of ForSalebyOwner.com’s headquarters in New York City, granted that the market has been cooling off recently in the hottest markets, including New Jersey.

“We could be transitioning to more of a buyer’s market,” he conceded. “But it’s not a cause for panic—no one should obsess about it. It’s not the pop of a bubble. It’s just a slight deflation.

“Houses are taking a little longer to sell, but it’s not disastrous.”

Also commenting on Hughes’ advice, Maureen Doyle, broker-manager of RE/MAX Properties Unlimited in Morristown, said, “I don’t agree. I think we’ll see continual appreciation, but it will be more reasonable. Just not the 7 to 12 percent a year appreciation we’ve seen over the past four or five years.”

Her arguments:

• Interest rates remain relatively low.

• New Jersey doesn’t have much land on which to build new houses.

Doyle concedes that the inventory of houses for sale has increased—up 20 percent in the past year, while sales have increased only 6 percent.

And houses are taking longer to sell.

Has the spike in energy prices had any effect?

Perhaps buyers are looking for places closer to work now, Doyle said. The farther east a house is, generally the more in demand it is. Chatham houses are pricier than those in Morris Township.

A colleague recently sold a house in Chatham for $100,000 more than the asking price—for close to $1 million, she said. One reason: The house was within walking distance of a train.

Is use of the Internet growing?

Absolutely, Doyle replied. A study by the National Association of Realtors found that more than 70 percent of buyers use the Internet to do research, and they buy faster than people who don’t use the Internet: in three weeks rather than in six weeks or longer.

Also in disagreement with Hughes: Dominick Prevete, regional vice president of Weichert, Realtors in North Jersey. “Prices won’t decline significantly, but we will return to single-digit appreciation next year,” he predicted.

The big change next year will be: Buyers will have more choices and less competition. There also will be fewer bidding wars.

He also predicted that interest rates will stabilize at a high 6 percent or at 7 percent—still reasonable for most buyers, he said.

Buyers who wait for the bubble to burst will learn that there was no bubble—and they may miss out on good purchases while waiting fruitlessly for prices to decline, he said.

As for sellers, Prevete said they will be more sensitive to marketing plans in view of the greater competition.

In the past, there might have been only one house for sale in a neighborhood; now, there may be competition. And sellers will have to learn to put more reasonable prices on their houses.

What about the rise in heating costs?

Buyers are more concerned about those costs, he reported. But he hasn’t seen sellers improving the insulation of their houses yet.

Among Sambrotto’s other predictions:

• As home sales soften, more sellers will turn to fee-only and discount brokers.

• The number of working real-estate agents will shrink.

• Home renovations will stress energy efficiency.

• Buyers will avoid storm-ravaged coastal areas.

Orlando-area existing-home sales continued on a record setting pace in November, though the month-to-month increase in the median price has slowed considerably and inventory is now the highest in more than nine years, the Orlando Regional Realtor Association reported today.

The median price of homes sold in November was $249,000, up only 1.3 percent from October but a 37 percent increase from November 2004.

The pool of homes for sale last month reached 9,685, a 163 percent increase over November of last year and the highest level since July 1996. Brokers say the market is entering a slower paced phase, thus the growing inventory, but sales are still strong.

The 2,336 homes sold last month were a 23.1 percent increase over November of last year. Sales for the year are expected to set a record for the 13th consecutive year.

Optimism among US homebuilders unexpectedly fell in December, dropping to a 32-month low, as executives braced for a slowdown in the housing market after a five-year boom.

Fargo’s index of builder confidence slid to 57, the lowest since April 2003, from a revised 61 in November, the Washington-based association said yesterday. The median forecast in a Bloomberg News survey of 15 economists was for an increase to 61 from an originally reported 60 for November.

Rising mortgage rates have priced some buyers out of the market in recent months and made speculative purchases less attractive for investors. Companies including Toll Brothers Inc., the largest US builder of luxury homes, are cutting sales forecasts, suggesting housing will make a smaller contribution to economic growth.

‘’The housing market appears to be coming off the recent record pace of home sales,” David Seiders, the homebuilder group’s chief economist, said in a statement. ‘’Our surveys indicate that three out of every four builders are experiencing some buyer resistance to current home prices, and many are offering certain concessions to buyers in order to help maintain sales volume.”

Forecasts in the Bloomberg News survey ranged from 58 to 64. Readings greater than 50 mean builders consider the outlook for sales to be positive.

The gauge of buyer traffic fell to a 33-month-low of 39 this month from 46 in November. The current sales measure dropped to a 31-month-low of 63 from 67. Expectations for the next six months held steady at 65.

Confidence declined in all four regions, with the biggest drop occurring in the West, which slid to 74 from 81. Confidence in the Midwest fell to 33 from 37, in the Northeast to 59 from 61, and in the South to 66 from 68.

Toll Brothers on Dec. 8 said earnings in 2006 may increase at the slowest pace in four years after fiscal fourth-quarter profit gained 72 percent on demand from affluent buyers.

‘’We’re seeing a moderation” in demand, chief financial officer Joel Rassman said.

The National Association of Home Builders forecasts declines next year of 6.5 percent for new home sales and 5.8 percent for housing starts.

Mortgage rates are rising as the Federal Reserve raises borrowing costs to control inflation. The 30-year fixed mortgage rate has increased to 6.30 percent from 5.77 percent this year.

© Copyright 2005 Globe Newspaper Company.

For those in the market to buy or sell a house, there’s good news and bad news about the housing market for next year.

The bad news: Sales of existing homes, expected to rise 4.7 percent to 7.1 million this year, are projected to decline 3.7 percent in 2006, to 6.84 million, according to the National Association of Realtors.

The good news: Despite the drop in sales, 2006 will be the second-best year in history for existing home sales.

“The slowdown amounts to a tapping of the brakes on a hot market,” said David Lereah, NAR’s chief economist, in a written statement. “Home sales are coming down from the mountain peak, but they will level out at a high plateau—a plateau that is higher than previous peaks in the housing cycle.” Lereah added that the transition to a “more normal and balanced market is a good thing.”

Despite the drop in sales, NAR is forecasting a continued upswing in home prices for 2006. The national median existing-home price for all housing types (including single-family homes, condominiums and townhouses), which is experiencing a surge estimated at 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent next year, to $221,400. The median new-home price is expected to rise as well, by 7.3 percent, to $250,100 in 2006 as higher construction costs affect the market.

Despite problems from storms, Florida’s median home price rose 28 percent in October (the latest month for which statistics are available) to $241,000 from $188,800 in October 2004. The median price of an existing single-family home in Broward, Miami-Dade and Palm Beach counties in October was $368,900 (up 25 percent from the previous year), $366,300 (up 29 percent) and $416,500 (up 24 percent), respectively.

The South Florida market, which local brokers say has been starting to cool for the past few months, is also expected to remain strong in 2006, although prices and sales numbers are expected to stabilize.

“We’re returning to a state of equilibrium, which is what we’ve been anticipating,” said Ann DeFries, president of the Realtor Association of Greater Fort Lauderdale. “We knew that prices could not continue to climb the way that they were. Buyers have basically said, `That’s enough.’”

Since Wilma blasted her way through South Florida, more inventory has hit the real estate market as people list their homes for sale, DeFries said. The sellers in her area include seniors planning to move into condominiums to avoid the hassle of hurricane preparation as well as people who want to escape hurricanes entirely by moving out of the area.

How will the increased housing inventory affect the market? “It’s all about supply and demand,” DeFries said. “Houses need to be priced properly now. The days of overpricing a house are gone.”

Other real estate agents agree. “We may not get 35 percent growth [in prices] like we’ve been getting the past two years in Palm Beach County, but I would not be surprised if we get 10, 15 or 20 percent growth,” said Allan Spiro, a real estate agent with Keller Williams in Boynton Beach.

Spiro said that he’s been seeing more people list their homes for sale for the past few months, creating more inventory for buyers to choose from. “The pendulum was on the sellers’ side, with few listings and a lot of buyers,” he said. “Today we’re almost on the other end of the spectrum, with a lot of listings on the market and few buyers.”

He said he considers it an “end of the year slump” and expects demand to pick up after the holidays.

South Florida’s housing market is different from the markets in most other parts of the United States, experts say. Immigration from both northern retirees and Latin Americans creates constant demand, and many of the world’s wealthiest people want to have second, third or fourth homes here, fueling the ultra-luxury market. There is little land left in most parts of South Florida for new construction, so sales of existing homes remains stable.

“We’re basically recession-proof here,” DeFries said.

Of course, a severe winter up north will drive more buyers to the South Florida market, experts say. “People forget about hurricanes,” DeFries said. “We are very happy that they had their first snowfall already.”

A panel of economists and real estate professionals meeting at the University of San Diego said yesterday the county’s housing market was returning to normal growth patterns following the boom that began in the late 1990s.

“I think the bloom is off the rose, but there is no doom and gloom,” said Alan Nevin, chief economist for the California Building Industry Association.

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The fundamentals of the housing economy remain sound, said Louis A. Galuppo, director of USD’s Burnham-Moores Center for Real Estate. “We may see a decline in sales but not prices.”

Despite “air leaking out of the tire,” there are no major economic triggers, such as massive job losses, to cause the housing market to crash, said Joe Anfuso, chief financial officer of Shea Homes San Diego.

Outlook 2006, Burnham-Moores’ sixth annual residential real estate conference, drew about 480 people to USD’s Jenny Craig Pavilion. Those in attendance for the early-morning session heard experts dismiss the possibility of a bursting real estate price bubble.

Despite rising interest rates, a growing for-sale inventory and a slowing sales pace, the county’s shortage of housing will prevent prices from dropping steeply, speakers asserted.

“It’s Economics 101,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “It’s demand and supply.”

In figures released outside the conference yesterday by DataQuick Information Systems, the county’s median home price rose 6.4 percent in November, far less than the double-digit gains of April but strong by traditional standards.

Addressing the statewide economy, Appleton-Young forecast “a slight decline in home sales” for California in 2006. Many established homeowners have cashed out rising equity and now lack the funds to trade up to larger homes, she said. “We are going to see people staying in their homes longer.”

Another reason homeowners are staying put is Proposition 13, the landmark property-tax-cutting initiative. Passed in 1978, the measure limits tax increases on properties until they are sold. Many owners are reluctant to sell and give up their tax breaks, Appleton-Young said. If they buy a new home at a higher price, “they look at doubling and tripling their taxes.”

Several speakers at the conference addressed the use of new lending products that had enabled middle-wage consumers to attain financing for high-priced homes. Many “creative” mortgage loans have low, introductory payments that adjust upward with prevailing interest rates after several years. In general, they shift risk from the lender to the borrower.

Anfuso said fears that such loans would trigger defaults were misplaced. Many borrowers “are going up the wage scale” and will be able to handle rising payments, he said.

Michael Perry, chairman and chief executive of IndyMac Bankcorp, said he expected new federal guidelines to address such loans. Appleton-Young said some borrowers may find themselves overburdened by debt because of newer mortgage products.

“We may see a blip up in foreclosures and delinquencies,” she said.

During a panel discussion called “Has the Bubble Burst? What’s Next?” Alex Zikakis, president and founder of Capstone Advisors, said he didn’t see a strong presence of speculators in the local residential real estate market. Jill Morrow, president and chief operating officer of Coldwell Banker San Diego, said the local housing market was not driven by investors.

“We have a lot of diversity in our economy,” she said.

In her forecast, Appleton-Young predicted a 2 percent statewide decrease in single-family home resales next year. She anticipates a 10 percent statewide increase in the cost of a median-priced resale home.

Citing an affordability crisis, Appleton-Young said trends showed that only about 15 percent of California households would be able to afford a median-priced home, compared with about 50 percent of households nationally.

In the long run, California’s lack of affordability will lead more businesses and employees to consider moving out of state to areas where homeownership is more attainable, Perry said.

USD economist Alan Gin said the county’s overall economy would outperform the state and the rest of the nation in 2006. Gin said he was concerned that most of the jobs being created here offered modest salaries, however. He also cited rising interest rates and high gasoline prices as concerns for local consumers. Even so, the housing market will cool but not collapse, he predicted.

Appleton-Young called California real estate a market in transition. “I think we’re in for a soft landing,” she said.

Escalating prices that have made houses unaffordable for many people in Washington are mostly the result of homeowners using political and regulatory means to block construction of new housing, economic studies show.

Washington home prices continued to soar last month despite a slowdown in sales, with gains of 21.5 percent and 18 percent over November 2004 in the District and Montgomery County, respectively, the Greater Capital Area Association of Realtors reported.

It now costs $618,692 to buy an average-priced home in the District, and $560,327 in Montgomery County. Prices in Northern Virginia also have maintained breathtaking heights, among the highest in the country, despite some slackening of sales.

The remarkable run of record housing sales and prices since 1998 has become a major puzzle and topic among economists. The high prices have put homeownership out of reach for many young people and low-income households hoping to break into the market.

Economists increasingly are concluding that the shortage of affordable housing in Washington and other major U.S. cities on the East and West coasts is a result more of man-made restrictions on development than high construction costs or other market forces.

“It simply takes too long and is too expensive to move through the development process,” said Mark Vitner, senior economist at Wachovia Securities, pointing at “smart growth, slow growth and no growth” movements in many of the same areas where the population and demand for housing are growing the fastest.

What many economists have been proclaiming as a “bubble” in Washington and other high-cost areas can be mostly explained by the restrictions on development, combined with a rush to homeownership by renters taking advantage of low interest rates, he said.

The restrictions have mounted as homeowners have grown more powerful and more willing to use their power to stop or greatly restrict development in their neighborhoods through the political and regulatory processes and the courts, according to a study published recently by the National Bureau of Economic Research.

Since 1970, Washington and other coastal cities where housing prices have exploded have seen “a significant increase in the ability of residents to block new projects,” transforming vast swaths of the cities into “homeowners’ cooperatives” that are no longer open to growth, said Edward L. Glaeser, Harvard economist and one the study’s authors.

The study encompassed trends in Washington and 315 other U.S. cities since the 1950s. It found that the explosion in house prices ironically has occurred in areas where the price of housing already was high, making homeownership increasingly unaffordable while the cost of housing remained reasonable and affordable throughout the vast interior of the country.

“Changes in housing-supply regulations may be the most important transformation that has happened in the American housing market since the development of the automobile,” Mr. Glaeser said.

Before 1970, home prices in Washington and the rest of the country mostly reflected the cost of acquiring land and building on it. That was also the era when most existing houses were built. Now, construction costs represent half or less of a new or existing home’s price in high-cost cities, the study found.

The increasing power of homeowners to block construction, forcing buyers to bid up the prices on the few homes available, is only partly a result of steady growth in the portion of the population that owns homes, which now stands at a record high near 70 percent.

It also is a result of the increasing willingness of homeowners to use that status through political activism and the courts to maintain low density, green spaces and other amenities in their neighborhoods, at the expense of newcomers, the study found.
As the housing boom has rolled along in recent years, nearly every jurisdiction in the Washington area has witnessed movements to further restrict development.

Montgomery County imposed a temporary moratorium on building this year after a controversy over a developer’s violation of height restrictions in Clarksburg.

The county already had banned most development in one-third of the jurisdiction set aside as an agricultural reserve. Under pressure from residents’ groups, it is considering further restrictions on building in the reserve by churches and nonprofit institutions.

Loudoun County, one of the fastest-growing jurisdictions in the nation, put severe restrictions on the density of housing several years ago, but some of those restrictions were overturned later by a more pro-development Board of Supervisors.

Prices are booming in the District, where federal ownership of large tracts has limited the land available for development and height restrictions imposed by Congress have been in effect for more than a century.

Prince George’s County, with much land available for development, only recently lifted a restriction against building in areas where police and fire-safety infrastructure is not able to accommodate new residents.

Even Fairfax County, which gained fame in earlier decades for free-wheeling development policies that led to rapid job growth and construction, is contending with homeowners against plans to increase the density of housing near the Vienna Metro station.

Neighborhood activists often use tactics such as demonstrations, sit-ins and write-in campaigns, while vilifying developers who rely on lobbying and traditional money politics to win approval of their building plans.

The Harvard economists said developers and renters—the consumer group that stands to gain the most from increased housing construction—rarely are as effective at organizing as homeowner groups, which often align themselves with and use the tactics of environmental groups.

“Rising education levels and learning from other political battles—i.e., the civil rights movement—may have made community members more savvy about using the courts and the press,” said Mr. Glaeser, while the high incomes of homeowners make them more demanding of the amenities they seek to protect.

The resulting shortage of housing causes an escalation of prices as new residents and renters seeking to become homeowners bid up prices to purchase the few homes available. That further serves the interests of the homeowners by pushing up the value of their houses.

The result is to turn the housing market on its head, the study found.

High home prices should act as an inducement for developers to build more houses, increasing supply and lowering prices. But construction rates in Washington and other high-priced cities are substantially lower than those in the interior, less-pricey areas of the country.